Owning a credit card comes with many advantages. In today’s day and age, where making purchases in cash is seemingly going away, credit cards offer convenience. The younger generations probably don’t even carry any cash on them considering they can pay for pretty much anything with their phone or watch! Owning a credit card and using it responsibly can be a powerful tool. Here we will discuss the benefits of a credit card.
Ease of Use
Credit cards are so easy to use. This is especially true considering many merchants now offer no touch payments. All you have to do for this is to link your credit card to your phone. This can either be AndroidPay or ApplePay. You can also link your card to your watch or other smart device.
Over the last decade, many merchants have started accepting credit card payments. This is even true for new, small businesses, and even your favorite mom and pop shops. Back in the day you used to be surprised when a business was able to accept credit cards. Today, it is the total opposite. If a business doesn’t accept credit cards or other forms of smart payments like Venmo, then they are missing out on a lot of possible customers!
In addition to being very easy to use, one of the benefits of a credit card is that they are very safe. One of the biggest downsides of carrying a lot of cash on you is that it is a risk. If you lose your wallet, or drop a dollar bill on the ground, chances are you are never seeing it again. Now, if you lose your credit card, you shouldn’t suffer any financial hardship. All you have to do is call up your credit card company and they will issue you a new one. Many credit card companies can also temporarily stop all transactions on your credit card. In some cases, you can even do this on your credit card app!
Now, what happens if you lose your card and someone makes a fraudulent purchase with it? Or someone hacks your personal data and steals your credit card information to buy something? At the end of the day, you will not be financially liable. If you put in a claim with your credit card company or bank, and report the purchase as fraudulent, in most cases they will reimburse you. It may take a while to get your money back, but at least you will get it. The same cannot be said if someone steals your cash and bought something with it.
One of the best benefits of a credit card is that you can earn rewards every time you use it. One of the ways credit card companies make money is by something called interchange income. This is when the credit card company charges merchants for each credit card transaction they accept. For each payment made with a credit card, the credit card company gets a small fee, usually a couple pennies. Because the credit card companies earn money every time you use your card, they want to incentivize you do use it as much as possible. This is one of the reasons they offer awesome rewards.
The types of rewards depend on the credit card company and the type of card you get. For instance, you can earn a certain percentage cash back for every qualifying purchase you make. With some cards, each dollar you spend gets exchanged into points or miles that you can use on travel. CapitalOne’s Venture card gives you double miles for every dollar you spend which you can use to travel, book hotels, and rent cars. You can also redeem these miles for cash, although the exchange rate from travel points to dollars is never one-to-one.
In additional to these rewards, you also can get access to some other perks. If you have travel specific credit cards, you may get free access to travel clubs at airports. These lounges may offer you free foods and drinks (which is always great when traveling). Also, you may get a discount on different services or products.
Helps You Track Spending
If you are making all of your purchases in cash, it is easy to lose track of where your money is going. If you use your credit card, you will be able to keep track of your spending habits very easily.
Many credit card companies offer online portals that can provide you with a ton of data on your spending. You can see each transaction, and even get notifications on your phone each time you buy something. On the site, you can even see a dashboard that groups your expenses into different categories so you can see how much you spend on your bills, on groceries, gas, and everything else. It is a great perk. In addition to this, your credit card company may even offer budgeting tools on their websites. These can be great resources to keep your spending on track.
So far we have covered many of the different benefits of a credit card. The best benefit of a credit card, hands down, is that it can help you build credit. Your credit history is a very important metric of your overall financial picture. It tells banks, lenders, and other financial institutions if you are good with money. Your credit history impacts your credit report, which determines your credit score. A credit score is basically just a rating of your finances, and can range anywhere from the 300s all the way up to 850.
Factors that Impact Your Credit Score
There are several factors that go into determining your credit score. One of them is age of credit accounts, or how long you have had financial accounts (specifically credit cards or other lines of credit) open. The longer, the better. Another factor is if you pay your credit card bills on time. If you don’t have a credit card, then you won’t be able to build strong credit by paying off your credit card bills when they are due!
The last factor I want to discuss is something called utilization ratio. This is a number that represents the percentage of your credit balance that you use up on average. For instance, if your credit limit is $10,000, and you only ever put $1,000 maximum on your card, then your average utilization rate is 10%. It should be your goal to keep your credit utilization ratio in the single digits. Your credit utilization ratio takes into consideration all open lines of credit. So one way to keep your utilization ratio low is to have a high balance, or to have multiple open lines of credits (or credit cards)
Your credit score will affect you in many ways. For instance, it can help banks determine what interest rate on a loan they can offer you. If you have a low credit score, you are seen as being a bigger liability. If you have a perfect credit score, you are not a liability because they know you will pay your loan. You will then get a very low interest rate on a loan. This is a very important thing to consider, especially if you are looking to buy a car or get a mortgage. The difference of just 1% could save you tens of thousands of dollars over the life of your mortgage.
Additional Things to Consider
There are many benefits of a credit card. That being said, if used irresponsibly, a credit card can ruin you financially. Having access to tens of thousands of dollars worth of credit can be tempting and make you overspend.
Want a new laptop or phone? Just put it on your credit card. Looking to get a whole new wardrobe? Just charge it.
It is important to have healthy spending habits and budget accordingly when you get a credit card. If not, you can get into a lot of debt. This is horrible considering credit card companies charge very high interest rates – sometimes they can be up to 25%. If you get into a lot of credit card debt, and are having problems paying it off, it can ruin your credit score. If this has happened to you, definitely look into ways to improve your credit score.
Benefits of a Credit Card – Summary
As we mentioned, having a credit card comes with a ton of benefits. First, using a credit card is much safer and easier then using cash. Plus, for every dollar you spend on your card, you can get really great rewards, including cash back. Lastly, using a credit score can help you keep track of your expenses and help you build strong credit.
All of that being said, having a credit card does come with some risks you should be aware of. With access to a high credit limit, you may be tempted to spend money you don’t really have which can get you in debt and ruin the credit score you worked so hard to build.
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