When it comes time to make a purchase, credit cards are usually the best way to go. Charging a purchase or expense to a card can help you accrue rewards, get more fraud protection, and benefit from extra perks few know about, all without paying interest as long as you always pay your statement balance in full.
Here's when it's smart to use your credit card and when you should leave it in your wallet instead.
Credit cards are the best way to pay online
It's smart to use your credit card for anything you buy online. Credit cards offer more fraud protection than debit if your card number ends up in the wrong hands.
By law, credit card users are only liable for up to $50 of unauthorized or fraudulent activity at the very most. In contrast, debit card users are liable for up to $50 for unauthorized or fraudulent charges if they report the issue within two days, and up to $500 if they report the fraud within 60 days. After 60 days, all the liability falls on the cardholder, not the bank.
In practice, most banks don't exercise their legal right to make the cardholder liable for any fraudulent purchases that are reported quickly, fearing the negative public relations attention that would come of it, but the fact is that it's much better to have a fraudster use your credit card than your debit card, particularly since your balances can be tied up in limbo while a bank completes its investigation into any unauthorized activity.
If it's expensive, it should go on a credit card
Credit cards offer valuable protections against faulty products or services, and paying too high of prices. Some common credit card features include:
- Chargebacks -- While chargebacks can be done with debit or credit, the bank has a much bigger incentive to reverse credit card charges than debit card charges. Reversing a purchase from a debit card returns your money. A chargeback on a credit card returns the bank's money, which is an important difference.
- Extended warranties -- Most credit cards offer some kind of extended warranty for purchases made with the card, typically adding a year of coverage after the warranty provided by the manufacturer. There are some obvious exclusions to most warranties (you won't get a warranty on an antique or used item, for example), but the extended warranty can be really valuable for particularly expensive purchases such as TVs or computers.
- Price protection -- Price protection offered by credit cards can be an excellent feature that too few people know about. If you buy a product and it is advertised at a lower price 30 or 60 days later, you may qualify for price protection that reduces the price you paid to match the new price of the item.
Credit cards were practically designed for travel purchases
Most travel-related purchases are best fit for a credit card rather than debit or cash. The reasons vary by the type of purchase.
- Rental cars -- Most rental car companies make it a pain to pay for a rental car by any method that isn't credit. Cash is often turned away. Debit cards can be used, but only with a large deposit, which can lock up money in your account until the car is returned. Credit cards enable you to float a deposit with your credit line, and offer additional protection if the car is returned with damage. Most credit cards offer rental car insurance when you pay for the rental with your credit card. The best cards offer primary coverage that steps in before your personal car insurance, helping you dodge a claim and the resulting increase in your premiums.
- Airfare -- Credit cards are best for airfare purchases. Often, travel credit cards offer what's known as "trip delay insurance," which is a valuable benefit if you get held up waiting for a delayed flight. After a certain amount of time passes, which can range from three to 12 hours, your credit card may cover up to $500 of purchases for reasonable "expenses incurred for meals, lodging, toiletries, medication, and other personal use items due to the covered delay" per ticket, according to one credit card's benefit guide. If you've never had the privilege of watching your flight get delayed over and over again over a holiday weekend, this might sound like a small benefit. But if you have, you'd know just how nice it is to be able to pay for some conveniences on the card company's dime to soothe the pain of waiting it out.
- Hotel stays -- Most hotels prefer payment by debit or credit card, but the big advantage to credit is that you won't tie up your bank balance when the hotel charges the deposit to your account.
Of course, all the above ignores one of the most obvious benefits: Travel purchases are one spending category where credit card companies dole out especially high rewards on every swipe.
When you shouldn't pay with a credit card
For most purchases, credit is better than, or on equal terms with, debit cards and cash. But there are a couple instances where a charge absolutely shouldn't go on a credit card.
- Taxes, rent, and some utilities -- Paying U.S. federal or state taxes, rent, and utilities by credit card is convenient, but you'll often pay a convenience fee of 2%-3% of the amount to do it. On a $1,000 payment, which isn't out of the norm for taxes or rent, the convenience fee can add up to $30. Avoid the fee by paying via fee-free methods.
- Things you can't afford to pay with cash or debit -- This may seem obvious, but if you wouldn't make the purchase with cash or debit, you shouldn't pay for it with a credit card, either. Data from the Federal Reserve suggests that as many as 60% of credit card accounts were used to carry a balance for at least one month in 2015. While some people were likely taking advantage of 0% intro APRs on purchases or balance transfers, it's likely that many were also paying interest on their balances. If you can't afford it without paying interest, then you certainly can't afford it if you'll have to pay a typical credit card interest rate of 18% on top.
Used responsibly, credit cards are nothing more than a powerful financial tool. Given their advantages in the case of fraud, outsize rewards programs, and benefits like extended warranties and purchase protection, it's safe to say that responsible spenders would benefit by using a credit card for most of their spending. But these benefits are only worth it if you always pay in full each month to avoid paying interest on your balances.
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