One of the most confounding pieces of financial “advice” that consumers continue to be told is that credit cards are bad. I think’s that wrong.
Yes, interest rates often are very high, and carrying a balance while continuing to charge can keep people on a debt treadmill.
But I still think credit cards are one of the greatest financial inventions of the 20th century, both for banks and consumers.
However, according to a recent Gallup poll, the number of credit cards Americans say they own is now at its lowest point since the polling company began tracking this statistic. Fully 29% of Americans say they don’t own any credit cards, up from 22% in 2008.
“This suggests that credit cards — a staple of American consumer life for decades — might not be as vital a financial tool to individuals as they had been in the 1990s and 2000s,” Gallup says.
Indeed, debit cards have been the plastic payment card of choice for many years, and by a wide margin.
According to the Federal Reserve’s 2013 Payments Study, an overwhelming 64% of all general purchase card payments in 2012 were made with debit cards.
Clearly, I’m in the minority on this issue.
For me, credit beats debit hands down, for these 8 reasons:
Rewards for credit, none for debit.
Three years ago, most banks terminated their debit card rewards programs after the Fed capped the amount banks could charge merchants for accepting debit cards. Many credit cards give you 1% or more back on your spending, either in cash, airline miles, gift cards or statement credits.
Banks pay you to use credit cards.
Many banks are still willing to pay $100 or more to attract new customers. By contrast, bank checking account fees average more than $5 a month, in addition to overdraft and ATM fees, that can add up to hundreds of dollars a year.
Easier to balance your checkbook.
Every time you make a debit payment, you have to make sure you note it in your checkbook or you run the risk of overdrawing your account and paying an overdraft fee (average fee $30), which can be a lot more costly than finance charges. You don’t have to worry about that with credit cards. With credit cards, by contrast, you get all of your charges delineated in your monthly statement, and you can elect to pay the entire amount all at once.
The option to borrow if you have to.
If you can’t or don’t want to pay the full amount you owe, you have the option of paying it off later. I think that makes more sense than depleting your bank account.
30 days’ free credit.
Instead of having the money taken out of your account immediately, you can borrow money from the bank for free until your bill comes. There’s no better deal available.
Low-rate balance transfers.
Plus, if you have a strong credit score, you’ll be invited to transfer a balance at a low rate. Many banks are offering 0% interest on balance transfers for as long as two years for their best customers.
Better fraud protection.
If someone steals your credit card and uses it, you’re liable for no more than $50 in fraudulent charges, although many banks waive that fee entirely. There’s no liability on phone and Internet charges. Fraud protection on debit cards isn’t nearly as good. You’re liable for the same $50 if you notify the bank within two business days after you realize the card is missing. But you could be on the hook for up to $500 if you fail to notify the bank within 60 calendar days after your statement is sent to you, and there is unlimited liability (i.e., all the money in your account) if you fail to notify the bank after 60 days.