We hear all the time about problems with credit card debt and the irresponsible use of credit cards. But there are times when using your credit card the best financial move, provided your pay it off on time.
Potential for disputed claims
Unlike a debit card or cash payment where the money is taken from you immediately, credit cards are repaid at the due date. In certain situations this can give you extra leverage in getting your money back when a merchant rips you off by not delivering a product or misrepresenting it.
An individual like you generally has little leverage with a merchant, but a major credit card company does. In some cases, if you let your credit card company know that a merchant has failed to deliver a product, the credit card company will contact the merchant. In this case, the credit card company has more leverage to extract a fair settlement, since it handles future payments to the merchant.
To benefit from this extra bit of consumer protection, the payment has to be charged to the credit card and you have to have a good enough reputation with the credit card company for it to take your complaint seriously. While it's no substitute for avoiding shady merchants, having the credit card company on your side can help to provide an extra safety net.
Initial rewards bonus
When you get a new credit card, you should make sure to take advantage of the introductory rewards bonus to get the most out of your card. Now, this is not say you should use the card to make frivolous purchases, but, provided you can pay off the balance in full, using the card for things you would have bought anyway can make sure you get every benefit the card offers.
For example, the American Express Gold Delta SkyMiles Card offers 50,000 bonus miles for making $1,000 in purchases over the first three months. If you're going to make those purchases anyway, it makes sense to pick up the SkyMiles being offered, especially since by getting the card you must have some reason to want more SkyMiles.
Other cards, such as the Capital One Quicksilver Cash Rewards Card, offer a cash bonus for purchases made in the first three months. In the case of this Capital One card, it offers a $100 bonus for $500 of purchases, essentially offering you a 20% discount. So if you're going to make the purchases anyway, why not get them at 20% off?
The most important thing to avoid here is starting up a credit card balance that you can't pay off. To avoid this, you should consider setting aside the money to pay off the balance as you use the credit card. That way, when the bill comes, you can pay the balance in full and collect the rewards.
Major purchases you already have the money for
We all hear the stories of people putting big-ticket items on their credit cards and finding themselves neck deep in high-interest credit card debt. However, responsible credit card users can use credit cards for major purchases if they already have the cash on hand to pay off the balance in full.
Credit cards offer rewards based on the dollar amount of purchases, since the credit card companies are paid a percentage from the merchants. So if you have a credit card with 2% cash back, the purchase of a $1,000 big-screen TV will get you $20 back in cash.
But the most important part is to do this only when you would have otherwise paid upfront with cash, check, or debit card. The last thing you want is for that $1,000 purchase to become a $1,300 pile of credit card debt you haven't paid off a year later.
Please use responsibly!
Credit cards are financially dangerous when used irresponsibly but can have a positive side when used with care. Not only do they provide the convenience of swiping and signing, but they can also give you back rewards for your purchases while sometimes helping you in dealing with dishonest merchants.
Above all, the most important part is to pay off your balances in full and avoid the extra interest and fees from credit card debts.
Alexander MacLennan owns shares of and has options on Delta Air Lines. The Motley Fool recommends American Express and owns shares of Capital One Financial. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
More from The Motley Fool
Strong Demand, Tax Reform Drive UnitedHealth Profits Higher
Learn how much in tax savings the health insurer will reap.
Will 2018 Be Wheaton Precious Metals Corp's Best Year Yet?
Predicting the future is hard, but Wheaton Precious Metals looks like it has built-in growth that will play out in 2018 and beyond.
Was Amazon's $50 Million Football Bet Worth It?
Amazon revealed a few data points about its "Thursday Night Football" viewership.