When Charging It Is the Smart Move

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Credit cards' evil reputation isn't entirely unearned. These tempting little rectangles have led many people into a neck-deep quagmire of debt. But in certain situations, putting your purchase on plastic is nonetheless the smartest move you can make.

These are not those situations
Many people pay off their credit card debts each month, but plenty of others carry a balance. Even if the debt you carry is manageable, it still comes with a cost. If you charge a $10 meal and take your sweet time paying off your bills, you could be paying for that burger for 10 or more years -- and you might wind up paying as much in interest as you did for the meal itself. Similarly, a $1,000 sofa could cost you $2,000.

Even more insidiously, people who use credit cards tend to spend more than they would with cash. According to a study by the folks at Visa, when people buy fast-food meals, they spend 20% to 30% more with credit cards than they do when paying with cash. The average check at Subway restaurants doubled when the company began accepting charge cards. That's good news for companies, but only because it means you're spending more than you probably need or want to.

The silver lining here: Once you're aware of this human tendency, you can fight it. Whenever you pay with plastic, take a moment to be sure you're not overspending. Visualize the cost in cold, hard cash, rather than some magic transaction invisibly conducted by your card.

And now, the upside
Still, if you can keep yourself out of debt, there are advantages to using credit cards over cash or even debit cards:

  • Rewards. Some cards will pay you a percentage of the amount you charge, though issuers have been reining in some of these cash-back payments by making the rules more complicated. Other cards let you accumulate points that can be used to buy items such as plane tickets.
  • Credit score. Using a card helps you establish a credit history, and using it responsibly can improve your score. In addition to mortgage applications, that number can improve your image with retailers, insurers, and even potential employers these days.
  • Budgeting. Charging most of your expenses gives you a handy, painless record of your spending. Those paying in cash often end up wondering where their money went.
  • Price protection. If you charge a $1,000 large-screen TV to certain cards, and three weeks later find it on sale for $800, your lender might pay you the difference. Not all cards offer this, and various restrictions apply, but if you have it, use it. Other cards sometimes protect purchases against theft or accidental damage during your first 90 days of ownership. Perhaps most usefully, other cards extend the manufacturer's warranty on items you buy. Some cards will double the coverage period, while others will extend it to a year or longer. You'll likely have to have submitted the warranty registration paperwork when you bought the item, and you may need to supply receipts and the warranty to claim a repair cost.
  • Travel. Credit cards can offer benefits such as rental car insurance, roadside assistance (for a fee), additional coverage for luggage lost by an airline, and coverage for trip cancellations, delays, interruptions, and airplane accidents. Some lenders will even help you find a doctor on your travels, or help you get needed medications. Others will cover thefts from a hotel room if you charged your stay, or help you replace a lost plane ticket (at your expense).

Each card has its own set of benefits; make sure to investigate the perks each has to offer. And if your cards don't offer the bonuses you'd like, look into getting a card that serves your needs better.

The bottom line
Credit cards are neither diabolical nor divine. They're simply tools that can make your life better or worse, depending on how you use them. If you lack discipline, consider steering clear of credit altogether. If you can handle them, though, credit cards are sometimes the best way to pay for certain expenses.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. The Motley Fool is Fools writing for Fools.

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  • Report this Comment On October 21, 2010, at 10:31 PM, hachmujt wrote:

    Credit card companies charge a heavy fee when exchanging currencies. Maybe this is why they offer the travel perks.

    My Advantis Credit Union (Oregon) debit card beats my Chase card by more than 2% with currency exchange and they reimburse my ATM fees, even internationally.

    Advantis is also paying me 2.5% on the first 30K in my checking account. I think this is a pretty good place to keep your six months of living expense emergency money.

    I do support the author on rewards. We get about $500 in cash every year from the Chase rewards program. I have noticed that credit card companies are offering even better rewards lately. If you do not want to do evil remember that your local retailer is the one paying for your rewards, not the credit card companies or issuers.

    I also advocate the consumer protection. A friend booked a back country ski trip for seven of us on his credit card. We got in a dispute with them when they did not provide lunch which was promised on their web site. The guide service dug in and said too bad. One phone call and the credit card company reversed the charges for the entire trip. Within minutes the owner of the ski company called him back and gladly reimbursed us for the price of the undelivered lunches.

    I have not carried a balance on my credit card for over 10 years. If you carry a balance none of the mentioned benefits are worth it.

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