"In childhood, a library card takes you to exotic, faraway places; in adulthood, a credit card does." -- Evan Esar
Yes, credit cards can leave you plagued by debts, paying lots of interest. But if you're smart about it, paying off bills in full and on time, you can get good value from the cards you use. Indeed, they can deliver discounts and rewards galore and make your good times even better.
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Here are seven reasons credit cards are awesome, and one or more of them might surprise you.
1. You don't have to carry a lot of cash around
This reason to use credit cards is kind of obvious -- because they're so convenient. Without a credit card in your pocket, you might want to always have enough cash on you to buy most things that you might run across and want. Perhaps not enough for a car, but still a thick wad of bills. Credit cards free you from that -- you can keep just some cash on you. Credit cards probably provide even more convenience than you realize, when you consider that they let you buy from most online vendors -- and even from vendors all over the world. Credit cards take a lot of hassle out of traveling. (If you charge abroad, though, be sure to use a card that doesn't levy foreign transaction fees. Many of the best credit cards don't.)
2. You can keep track of your spending more easily
Another benefit of using credit cards is that they can help you keep tabs on your spending. With much of our cash spending, it can be easy to find ourselves wondering just where it all went. It's kind of important to have a handle on what we spend our hard-earned dollars on -- and tracking that information is critical for budgeting, too. If you charge most expenses and keep your credit card statements, you'll be able to flip through them and see just what you spent on what. Better still, some credit cards offer an end-of-the-year compilation report of your full-year spending.
3. Credit cards offer emergency relief
You probably know that you should have an emergency fund at the ready, stocked with about three to nine months' worth of all your living expenses, including housing, food, transportation, utilities, etc. It can save you if someone in your household experiences a sudden job loss or a costly medical emergency. If you don't have such a fund, though, or it's insufficiently fortified, then a credit card can provide welcome relief if you suddenly have to spend $2,000 on a new transmission for your car or you're downsized from your company. There's a downside, though -- which is why having an emergency fund is preferable. Any balance you carry on your credit card will be subject to significant interest charges. Credit card interest rates recently ranged from the mid-teens to well above 25%. Aim to pay off any high-interest debt as quickly as possible.
4. You can get hundreds of dollars in value from cards
Credit cards can also be awesome if they're actually paying you instead of you paying the card issuer. That can happen if you've got a great cash-back credit card or rewards card. Some cards offer a flat percentage back on all purchases. Others have tiers of percentages applying to different expense categories. Still others offer big rewards on a purchases in specified spending categories that rotate every few months. Some cards offer a combination of these features.
To make the most of one or more cash-back credit cards, think about your spending habits. For example, if you charge a lot at many different places, you might opt for a general-use cash-back card. You'll find some general cards paying as much as 2% back on everything. If you spend, say, $1,200 per month on your credit card and earn 2% back, that's $288 per year. If you spend a lot at a retailer such as Amazon.com and you have a store card that pays you 5%, you can save even more. Spend $250 per month at Amazon? That's $3,000 per year, enough to earn $150 back. If you have a big family, you may be able to use a card that pays you 5% or 6% back at supermarkets -- weekly shops of $150 can net you $350 or more annually in cash.
5. Credit cards can help you save tens of thousands of dollars
Another benefit of using credit cards is that they can help you establish a strong credit history and thereby have a high credit score. High credit scores mean you can get offered the best interest rates when taking out big or small loans, such as for a used car or a big new house. You can build a great credit profile by paying all your bills on time and not owing too much relative to your overall credit limit, among other things. (Some suggest aiming to owe less than 30% of your combined credit limits.) Here are the components of the widely used FICO score:
And here are what good and not-so-good credit scores look like.
Ready to see what a difference a great credit score can make in your life? Check out the following example of mortgage payments for someone borrowing $200,000 with a 30-year fixed-rate loan:
See? You might save tens of thousands of dollars by having an excellent score instead of a fair or poor one.
6. Credit cards can help you get out of debt
If you're carrying a lot of credit card debt -- and, really, any credit card debt is too much, as the interest rates are so high -- know that you should and you can get out of debt. It may seem odd, but one tool that can help you do so is another credit card -- specifically, a good balance transfer credit card. You should only employ this strategy if you have the discipline to use the card just for paying down your debt and not for adding more debt to your burden. Balance transfer cards feature 0% interest for an initial period, which generally ranges from about 12 to 21 months. If you sign up for such a card, aim to get your debt paid off during that time, because if you don't, you'll face interest payments when the initial period ends. (If you anticipate that happening, you can mitigate the damage by finding a card with relatively low interest rates.) Note that some cards will charge a balance transfer fee of several percentage points of the amount you transfer, and that can cost you several hundred dollars. Such a fee can still be worth paying -- but know that some cards don't feature such fees.
7. Some cards offer nice perks
Finally, many credit cards offer nifty perks. Some shopping cards, for example, might offer free shipping on items purchased at the sponsoring retailer, while others might let you return items without a receipt or will donate money to charity whenever you use the card. Some travel credit cards will give you access to VIP lounges in airports and free checked bags. Many cards offer insurance on some purchases, or extended warranties or theft and damage protection.
Clearly, there are lots of reasons to use credit cards. Just be aware of their dangers, such as how easy they make it to accumulate costly debt, and use them responsibly.
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