Macro Mondays: Credit Cards (Part 8 of 10)
Welcome to another installment of GradMoney Macro Mondays where we continue our discussion of credit cards. Today we complement last week's discussion on the cons of credit cards, by now taking a look at what is good about having a credit card. You didn't think it was all bad, did you?
While there are quite a few perks to credit cards, it is important to always be careful and understand what you are getting yourself into, as well as understand how credit usage will effect your credit score and ability to borrow money in the future.
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One of the biggest reasons people enjoy using credit cards is that they’re convenient. You don’t have to worry about having enough cash on hand before you go to the store, and you don’t have to hold up the line by writing a check. But those aren’t the only pros of using a credit card.
Credit cards allow you to delay payment for purchases. If you don’t carry a balance, you get an interest-free grace period from the day you charge your purchase until the day your statement is due. You can buy something on your credit card at any point during your billing cycle and not have to pay for it until weeks later, when your bill is due. You can also use your credit card to borrow money, with interest, if you must.
Credit cards provide protection against purchases that don’t work out. Say you use your credit card to purchase a new suit that turns out to be defective. The store won’t give you a refund. Contact your credit card issuer: If your card has a return guarantee benefit and you meet the terms and conditions, you may receive a refund. Some cards also offer a refund if an item you purchase with your card is damaged or stolen within 90 days of buying it.
Your credit card can also protect you and save you money when you rent a car. Instead of paying extra for the rental company’s collision damage waiver coverage, decline it and pay for the entire rental transaction with your credit card. If your rental car vandalized, stolen or in an accident, the credit card company will cover the cost. Check with your card issuer to see if this benefit comes with your card. Extended warranty protection on purchases is another common benefit.
For all of these reasons, credit cards are consumers’ favorite payment type, as the graph below shows.
Source: TSYS 2016 U.S. Consumer Payment Study, p. 6.
Help Building Credit
Making at least your minimum monthly payment on time each month and limiting your credit card use to about 20% of your credit limit, whether you pay the balance in full every month or not, is a good way to build credit. If you want to be able to get a mortgage, refinance, get a home equity loan, get an auto loan, rent an apartment or do anything else where having a good credit score is important, using a credit card responsibly will help you build the credit you need.
It is NOT necessary to carry a balance to build a credit history and earn a good credit score. You could literally make one tiny purchase per month and pay it in full and on time if your goal is to establish a credit history and earn a good score.
Simplified Purchase Tracking and Returns
A final benefit of charging your purchases is that it can help you keep track of them, which may be helpful for budgeting and, if you make any tax-deductible purchases, helpful for tax preparation. In addition, some stores will let you return items simply by presenting the credit card you used to pay for the item, even if you don’t have the receipt.
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