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Consumer Credit / Credit Cards
Re: The purpose of credit cards?

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By Patzer
August 26, 2005

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What is the purpose of using a credit card if they are so dangerous, besides renting cars?

Chain saws are dangerous, too, but that doesn't mean that no one should use them. Like chain saws, credit cards can make some common tasks much easier than they would be with the next best tool. Like chain saws, credit cards are safe and effective if you understand what they do, what they don't do, how to use them, and how not to use them. Like chain saws, credit cards can really hurt you if you don't understand them or attempt to use them in a way that is beyond your skill level.

In the afore-mentioned book it simply said "for convenience", but using debit cards/check cards you seem to get the same convenience as a credit card?

If a credit card is like a chain saw, a debit card is like a hedge trimmer. It has some minor additional safety features, it won't hurt you as badly if you mess up, and you still need to understand it and use it properly. You can use a chain saw to do many tasks that a hedge trimmer will do well, but a hedge trimmer will fail miserably at some tasks that a chain saw is good at.

There are three major reasons to use a credit card instead of a debit card. First, there is the float. Most credit cards allow you to buy now and pay next month. A fiscally conservative individual collects interest on his money until the credit card's due date.

Second, there are rewards cards. It's easy to find a cash-back credit card, where some small percentage of your purchases gets rebated to you. It's much harder to find a cash-back debit card.

Third, there is security. Credit cards give the consumer more robust protection in the event of erroneous charges. If I dispute a charge on my credit card, the charge is removed and stays gone unless my dispute is found to be incorrect. If I dispute a charge on my debit card, I don't get the money back until the dispute is found to be correct. This makes a big difference. If an individual runs his checking account near zero, one erroneous debit card charge can generate multiple overdraft fees. That means either greater expense, or a hassle to get the bank or credit union to waive the fees.

All of these major advantages happen fairly easily if you understand how to use the card: Charge only things that you can pay in full when the bill is due, and make sure you pay the entire bill on or before the due date. This is kind of like always wearing goggles and keeping your hands behind the protective shield on the chainsaw. It's not difficult to learn, but it can be very difficult to recover from the consequences of not doing it.

Also if there *is* a good reason for using credit cards, is the Motley Fools low interest 6.9 APR card for real? (can I ask this question on here?).

Yes, you can ask questions like this here. Which credit card is "best" depends on how you will use it. Different cards are best for different people with different spending patterns. I'm partial to the Citi Dividends MasterCard. Some other people prefer different rewards cards. People who are trying to recover from having lots of credit card debt tend to prefer whatever card will give them the lowest interest rate. One size does not fit all.

Welcome to the board!

Patzer


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