A large number of Americans, especially in the younger age brackets, use their debit cards to pay for most purchases. While there is nothing inherently wrong with this, it's not always the best way to go.
There are several good reasons for using credit cards more for everyday purchases. For one, you are much less vulnerable to theft of personal information, which as we know from the headlines is a serious problem these days. You can also earn some pretty nice perks and build a more solid credit history.
While I'm not advocating running up the balances on your credit cards, using them responsibly and correctly can help your finances now and moving forward.
Theft of credit and debit card information is a recurrent threat these days. While no one is immune to the massive data breaches seen in recent months and years, credit cards are less susceptible to other forms of theft.
One of the more common methods of stealing information is by using a device known as a "skimmer." This is a small card reader installed on a point-of-sale system in which customers swipe their own cards (such as a gas pump), and it is often installed with a small camera to see the cardholder's personal identification number. A debit card number and its PIN are really all a thief needs to make a fraudulent copy.
When you swipe a credit card at one of these places, you don't type in a PIN, the card's expiration date, security code, or any other information that would be necessary to duplicate the card. Some ask you to type in the billing ZIP code, which adds a level of security.
Of course, none of this is foolproof. It's entirely possible to have your credit card information stolen. Thankfully, virtually all major credit cards have a zero-liability policy for fraudulent charges. Not all banks do -- so even though you probably won't be held responsible for the entire amount of fraudulent charges, you could easily be on the hook for some money.
The perks can be nice
Credit cards can also earn you some sweet perks. For example, already in 2014 I've earned enough airline miles for a free trip, simply by charging for goods I would have bought anyway.
If you prefer cash, it's pretty easy to find credit cards that give you 1.5% back on all of your purchases. Over time, these can really add up. And many don't have any annual fees whatsoever.If you travel a lot, the rewards can be nice. In addition to miles, you can avoid baggage fees, be allowed priority boarding, and other perks.
Building a solid credit history
Many consumers avoid credit card use entirely. But as long as you pay off your balance each month, it's better to use your credit cards than to let them sit in your wallet, or worse yet, to not have any at all.
The largest component of your credit score is your payment history, which is easy enough to establish by simply using your cards and paying them off. The next largest component is "amounts owed," which assesses the amount you owe on your credit cards relative to your available credit. By just having one credit card you could be hurting yourself here.
Let's say you just have one credit card with a $1,000 limit. If you charge $200 worth of groceries, you are using 20% of your available credit. However, if you have three credit cards with $10,000 in combined limits, your credit use would be just 2%, which can look much better to creditors.
A little-known aspect of your credit score is "types of credit used," which accounts for 10% of your FICO credit score (the one most lenders use). Not having any credit cards can lower this part of your credit score considerably. Essentially, it gives banks no reference point to determine how responsibly you would handle a credit card.
There are other perks to using credit cards. For one, it can be much easier to track your purchases every month. As an example, I have one card I use only to buy gasoline. At the end of the month, if there is $250 on the card, I know I spent that much at the gas pump. The same goes for groceries and eating out at restaurants.
The key point here is that you should use your credit cards for purchases you were going to make anyway, and that you already have enough money to pay for. Carrying a balance on your credit cards is counterproductive to your financial health, so these rules apply to using credit cards as a debit card replacement only.
With some responsible usage, you can help protect yourself from thieves and put a little extra money in your pocket, all while building an excellent credit history for your future.
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