We are constantly told that the way to riches is to get out of debt, cut up your credit cards and live on a strict budget. Advice like this may be good advice for some people, but it is not a one size fits all strategy. In fact, for those who are good at managing their money, having one or two credit cards is recommended. Here’s why:
- Other People’s Money: If you pay off your credit card balance every month, technically you are borrowing the money for your purchases for 30 days at 0% interest. Some people take advantage of this to start a business by using their credit card, or purchase assets or items that can be sold at a profit.
- Your Earning Interest: While you are borrowing the bank’s or credit card company’s money, your cash you would have otherwise used is making money while it sits in your interest bearing account.
- Establishing Credit: Without having a credit history, the lack of credit can impede your ability to get a car loan, rent an apartment or sometimes even get a job.
- Helps Generate Credit Score: A minimum of a six-month credit history with some activity within the past six months must exist in order for a credit score to be generated. Regular use of your credit card ensures your credit report is updated regularly. Keep your balance lower than 30% of the limit, or the credit reporting agency will report that you are over-extended and living at or near your max.
- Necessary for Travel: If you travel, a credit card is necessary to rent a car, hotel rooms and other services that could incur incidental charges. Many credit cards also already include car rental insurance coverage, which you will not have to pay for through the rental agency.
- Earn Rewards: If you pay off your balance every month, not only are you establishing a good payment history for your credit score, but you could also get ahead from taking advantage of cash back, airline miles, discounts with the credit card’s “partners,” GM points that go toward the purchase of your next new car, and other point-based rewards programs. Click here to get an AMEX Blush Cash card to earn 5% cash back on your purchases.
- Track Your Spending: Using cash for everyday purchases can make it difficult to see where your money is going. By using a credit card, everything is documented for you, which can make sticking to a budget easy.
- Protect Your Purchases: Credit cards often come with insurance programs for theft or damage purchases, fraud protection and they can act as an agent for disputing purchases. The Fair Credit Billing Act allows you to dispute any charge anywhere in the world with a credit card that was issued in the United States.
- Theft Protection: If your wallet is pic-pocketed your cash is largely unrecoverable. Your credit cards, however, will protect you from purchases a thief made with your card.
- Automatic Bill Pay: Many credit cards offer to pay your monthly reoccurring bills for you automatically, which can save you time and avoid late payment penalties. In some cases, you can even receive a discount on your bills for setting up an automatic payment plan.
As you can see, credit cards can be a favorable alternative to cash for those who are disciplined enough to pay off the balance every month and use them for reasonable purchases.
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