Credit cards are financial tools, and like any tool, credit cards can be good or bad depending on how you use them. The flexibility and benefits that credit cards offer can be extremely valuable. However, the traps that some card users fall into dramatically outweigh those benefits. That's why I completely understand why some people aren't big fans of credit cards, and Fool personal finance expert Maurie Backman in this article describes some of the many reasons for this type of scorn.
I still think that those who have the discipline to be smart about their credit cards -- most notably, by paying their balances off every month and never paying interest charges -- can get past those potential pitfalls and reap the rewards. Here are five reasons why it can pay to use credit cards.
1. Rewards for your spending
I'm a huge believer in choosing credit cards based on what rewards they offer. For some, airline miles are the best perk they can imagine from a card, and there are plenty of card companies willing to give you miles for your purchases. Cold hard cash also has appeal, and cash-back cards are more common than ever. At least 1% back is pretty much the minimum you should demand, with alternatives giving you the ability to get up to 2% on all of your spending. Since you have to spend that money anyway, getting a small portion back with very little effort is just an extra bonus.
2. Extra rewards for certain spending
In addition to all-purpose rewards cards, you can also find cards that give you larger rewards on certain types of purchases. Some cards have rotating categories that change every few months, while other cards are designed to offer higher cash-back percentages on a specific group or groups of purchases. For these cards, rewards of 3% to as much as 10% are common. Most such cards require you to sign up, which is a bit of an extra hassle, and spending limits and other conditions can apply. Again, though, boosting your rewards on money you'd have to spend regardless will give you a modest windfall.
3. Extra interest on the float
One oft-neglected benefit of credit cards is the fact that they give you up to an extra month before the money you need to spend for a purchase comes out of your pocket. That money can earn interest while it's in your account. That hasn't been a big deal in recent years, with rock-bottom interest rates sending savings account rates to near-zero levels. But with the Federal Reserve now having made multiple moves in the past couple of years to hike rates, the benefit of earning some interest between the time you buy something and when you have to pay off your credit card statement is getting more valuable.
4. Freed-up cash for investment
Having an emergency fund is valuable to cover unexpected expenses without having to resort to expensive financing options like payday loans. However, every dollar in an emergency fund is one less dollar earning even better returns in a long-term investment. Some people successfully combine a more modest cash emergency fund with credit cards to give them the flexibility to handle immediate financial emergencies effectively. As long as you don't put yourself in a position in which you'll have to carry a balance, having a credit card as an emergency fund backup can help you bridge financial gaps more effectively.
5. No cost -- if you pick the right card
The best thing about all of these benefits is that you can usually get them free of charge. There are plenty of good rewards cards that don't impose an annual fee. In some cases, it might make sense to pay a modest fee in exchange for greater rewards that will more than make up for the cost. Generally, though, paying annual fees is something that you shouldn't have to do, as it's just money that goes out of your pocket to your card provider.
The only way credit cards pay
None of these benefits are worth it, though, if you carry a balance. The interest charges you'll incur are enough to outweigh any rewards a card will offer. In fact, the card company is counting on your making that mistake, and enough people do so that the card companies are immensely profitable.
You don't have to play that game. By being smart and responsible with your credit, you can get all of these benefits without any of the negatives. It takes effort, but the rewards are worth it in the long run.
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