Many financial planners believe that credit cards are the most dangerous financial tool that consumers have. It's true that credit cards make it possible to rack up huge amounts of outstanding debt, and their high interest rates can make it very difficult to dig your way out of a high-debt hole. However, used responsibly, credit cards have a number of advantages over debit cards and other payment alternatives. In particular, the following five attributes of credit cards can be extremely favorable for those who can take maximum advantage of them.
1. Using the float
Most credit cards only charge interest on your purchases if you carry a balance from month to month. Pay off your entire bill on time, and you can avoid ever paying interest on your purchases. Depending on when you make a purchase, that can give you anywhere from 15 to 45 days or longer between when you buy something and when you have to pay for it. Investors refer to that period of time as "the float" -- when you're essentially using someone else's money to cover purchases.
At current interest rates, the value of the float isn't as large as it used to be. But even at 1%, if you consistently spend $2,000 or so on your credit cards each month, you can put an extra $20 in your pocket by using the float and keeping money in your bank account longer. As interest rates rise, the value of the float will go up with it.
2. Reaping the rewards
Credit cards more frequently carry rewards for their use. Whether those rewards come in the form of airline frequent flier miles, discounts on certain purchases, or cold hard cash, the number of credit cards giving incentives to their cardholders is a lot greater than what you'll find among debit cards.
For instance, all-purpose cash-back cards offer as much as 1.5% to 2% back on all purchases, while specialized cards offer 5% or more for certain categories of spending. Cash or mileage bonuses just for signing up for a new card can quickly pay dividends. In general, you won't find these perks with debit cards or other payment methods, giving credit cards a key advantage.
3. Getting better fraud protection
The laws governing credit cards provide better protection to cardholders for fraudulent use than you'll find with debit cards and other alternatives. If something happens with your credit card, then federal law automatically protects you, making the maximum charge a card company can impose on you $50. Many credit card issuers don't force you to pay anything in case of fraud, giving you an even better deal.
Similar protections for debit-card fraud exist, but they require a lot more work on your part. In particular, to enjoy similar $50 limits to credit cards, a debit card holder must report the theft of their debit card within two days of the fraudulent charges taking place. Wait longer, and a $500 maximum applies, and beyond 60 days, you could end up being responsible for the entire lost amount. Unless you methodically review your bank account every day, the fraud protection that debit cards provide isn't nearly as practical in providing you peace of mind.
4. Arguing about charges
Not every dispute about charges involves fraud, and here too, credit cards offer a big advantage. The key is that with a debit card, money is already out of your account, and so you no longer have the leverage in spurring action. By contrast, with a credit card, you don't have to pay your bill until the dispute with your vendor gets resolved. You have all the leverage, and if your card company agrees with your side of the story, then you might never have to pay.
5. Getting extra perks
Finally, credit cards often provide additional protection that you won't find with most debit cards. Things like free rental car insurance coverage, warranties on purchases, and even accidental death insurance to pay off your balance under certain circumstances give you something that alternative payment methods don't.
Credit card companies make their cards as attractive as possible in the hopes that you'll carry a balance and pay huge amounts of finance charges. However, if you're responsible enough to pay off your balance every month, you can reap the rewards of credit cards without dealing with the disadvantages.
The Motley Fool has a disclosure policy.