Five Reasons You Should Keep Your Credit Cards

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Credit cardsCredit cards can get you in a lot of trouble. But that doesn't mean you need to stop using them. Used the right way, credit cards can give you huge benefits you won't find anywhere else.

Going Cold Turkey

Recently, Wall Street Journal columnist Brett Arends wrote about how he's giving up on credit cards entirely and going all cash. He cited some advantages to dumping his plastic, including greater privacy, studies that suggest that people spend less when they use cash instead of credit, and the simple idea that using credit cards benefits big Wall Street bank executives at the expense of local merchants.

All those things may be true for some people. But before you decide that it's worth it to cut up your cards and toss them in the trash, keep in mind that you may be different from the average person -- and might be giving up a lot by resorting to an all-cash lifestyle.

Reason 1: The Rewards

The right credit cards pay huge rewards. Arends largely dismisses them as not worth it, but many people like the idea of saving $0.20 a gallon on their gas. A 5% discount on rotating categories of purchases -- which companies like Discover Financial (DFS) and JPMorgan Chase (JPM) offer -- can save you sizable amounts of money. And as long as you were going to make those purchases anyway, why shouldn't you get some money back?

Even if you're just getting 1% to 2% in cash back, that's more than a drop in the bucket for many families. Spend $40,000 a year -- not a crazy amount for many middle-class households -- and you're talking about $400 to $800 back in your pocket. That's not chump change.

Reason 2: The Convenience

The number of people who pay ATM fees is appalling. But for many people, finding an in-network ATM when they're on the run simply isn't worth the hassle, so they'll happily end up paying $2, $3, or even $5 just to grab their own cash from their bank account.

Sure, there are still some places that don't take plastic. But most of the time, credit cards make things easier. And especially in situations like renting a car; trying to pay by cash and meet a rental car company's policy regarding an extra deposit can be next to impossible. With your credit card, by contrast, you just swipe and go.

Reason 3: The Float

Part of how Warren Buffett got rich is by using the "float" between when insurance policyholders pay premiums and when they make claims against their policies. Credit cards let you use the same trick, albeit on the much smaller scale.

As long as you pay your balance in full, you don't pay a dime in interest, but get as long as a month and a half between when you buy something and when you pay for it.

Of course, with savings rates at next to nothing lately, that doesn't get you a whole lot of income. But when savings accounts start paying 5% again, like they did before the financial crisis, that float becomes worth something.

Reason 4: Easy Tracking

Have you ever tried to budget by cash? The other day, I saw someone pull out an envelope at the grocery store that clearly held the person's budgeted money for food. Sure, it can work, but it involves carrying a bunch of cash around with you -- and making sure you have the right envelopes at all times.

In contrast, with a credit card, you have an easy backup. If you lose a receipt, you can go online and see all your spending going back as far as you care to look. That can help you be more realistic about how you actually spend your money -- and thereby make it easier to plan budgets for the future.

Reason 5: The Credit Score Boost

Perhaps the most important reason to keep your credit cards is to avoid deep-sixing your credit rating. Cut up your cards all at once and your available credit will fall through the floor, potentially making your credit score fall. On the other hand, if you pay dutifully every month, you may not make your card company happy, but everyone who looks at credit scores -- and these days, that can include not only lenders, but also insurance companies and even potential employers -- will feel a lot more comfortable working with you.

Play Your Cards Right

Used the wrong way, credit cards can be very dangerous for your financial health. But if you can make the most of them, they will serve you well.



Motley Fool contributorDan Caplinger took his last vacation on ridiculously generous credit card rewards. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of JPMorgan Chase. Motley Fool newsletter services have recommended buying shares of Discover Financial.


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38 Comments

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Rick Pua Pila

We’re coming up on tax time again, my most favorite time of the year – after my bi-yearly dental check-up and renewing my car’s registration at the DMV, of course.

I’ve been reading more than a few finance blogs (including tips from the IRS itself) that suggest consumers use their credit cards as a safe and convenient way of paying their taxes. Well, it might be convenient, it’s not the best way to pay for your taxes — especially if you’re working to repair your credit — and here’s why:

You’re charged a fee for the “convenience”

Every time you make a tax payment with your credit card, you aren’t actually paying the IRS directly – you’re paying a third party service. These service providers all charge a “convenience fee” for using their services, typically ranging anywhere from just under 2% to almost 4% of the amount you owe.

So, say you owe around $1500 in taxes, and you go with the service provider that charges 3.93% in interest. For using your credit card to make the payments, you could end up being charged an extra $59 that you wouldn’t have to pay had you not broken out your card for a charge.




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March 11 2012 at 1:10 AM Report abuse rate up rate down Reply
dvdfrnzwbr

Credit card users are parasites and should have manditory yearly fees applyed to their cards plus 3% on purchases.

July 21 2011 at 5:53 PM Report abuse rate up rate down Reply
toosmart4u

Lost your job, social security or medicare yet? Keep voting republican and you soon will.

July 21 2011 at 10:13 AM Report abuse rate up rate down Reply
1 reply to toosmart4u's comment
joehennes

off topic, reported for abuse. go to a political blog, there are plenty of those around.

July 21 2011 at 10:16 AM Report abuse rate up rate down Reply
toosmart4u

Lost your job, social security, medicare yet? Keep voting republican and you soon will.

July 21 2011 at 10:07 AM Report abuse -2 rate up rate down Reply
Robert

The article is idiotic. The writer must work for a bank. I read one comment where someone said the credit card is a money maker because they get cash back like 2% or 5%. I guess that person flunked math or never paid attention in class. They seemed to have forgotten about the 20% interest the bank charges. God, people are stupid!

July 21 2011 at 9:40 AM Report abuse rate up rate down Reply
3 replies to Robert's comment
souldoggie

I use my credit for every single purchase I possibly can. Why? Because it is a money maker. 2% back on every single purchase I make with my Schwab Visa. 5% back on select categories (gas, grocery, etc) during promotional months with my Discover card. Free airline miles when I use my Delta Amex card on airline purchases which I do often, as I travel for business.
Carry a balance on a credit card? That would be stupid and counter productive. That would mean I bought things I hadn't saved my money for yet and that I couldn't afford. I've never paid 1 cent in interest payments to a credit card company. What I do is use credit cards for income enhancement. Works great, you should try it, but don't try it if you have no self discipline.

July 21 2011 at 9:21 AM Report abuse +1 rate up rate down Reply
krazzicraig

v

July 21 2011 at 9:13 AM Report abuse rate up rate down Reply
Gunther

Have you tried to rent a car without a card. I offered a large cash deposit and wasn't able to rent a car.
Now what are you going to do?

July 21 2011 at 9:11 AM Report abuse +1 rate up rate down Reply
1 reply to Gunther's comment
Robert

Try a debit card and you won't incur the interest of a credit card

July 21 2011 at 9:36 AM Report abuse -1 rate up rate down Reply
evd10

I doubt if I've spent $400. in cash in the last 4 years except for paying those bills by check for taxes and utilities where you can't use a credit card or are charged a high fee for doing so. I only get back a few hundred a year in rewards, but it's better in my pocket than in someone else's. I haven't paid a dime in interest or a credit card fee for decades. What's the downside?

July 21 2011 at 9:11 AM Report abuse +1 rate up rate down Reply
dvdfrnzwbr

Using credit cards makes everything more expensive.

July 21 2011 at 5:45 AM Report abuse +2 rate up rate down Reply
1 reply to dvdfrnzwbr's comment
joehennes

Sooo, come up with an alternative equally convenient, less expensive system. You'll end up the wealthiest man on the planet. Go ahead, I'll wait.

July 21 2011 at 7:08 AM Report abuse +2 rate up rate down Reply
2 replies to joehennes's comment
dvdfrnzwbr

Its called cash sweet thing.

July 21 2011 at 8:12 AM Report abuse -1 rate up rate down
joehennes

Cash is not remotely as convenient. If it were credit and debit cards would not even exist. I personally hate using cash and almost never carry any. It is far less convenient and far more expensive.

July 21 2011 at 8:21 AM Report abuse +1 rate up rate down