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By Ben Heinze
There may not be a single personal finance tool more debated than the credit card. These little pieces of plastic have generated ample discussion for decades, with some claiming they’re destined to lead you into debt and others using them for purchase after purchase without a second thought. So, what’s the truth? Is using a credit card always bad, or is that merely a myth? We’ll delve into the common arguments against credit cards and lay out what is and isn’t true.
Truth: While credit card bills with high interest rates are certainly a thing, this claim ignores the fact that paying interest on credit card purchases is entirely avoidable.
Every time you use a credit card, that purchase is applied to your next statement bill. You can later choose to pay that statement in full or simply pay the minimum balance. While opting for the latter will incur interest, paying your statement in full will not. You can even automate paying your credit card bill to ensure you pay the full balance every month, thus never paying interest.
Truth: There are some layers of truth to this myth, but the reality is more complex. Whenever you pay with a credit card (or a debit card) as opposed to cash, the merchant has to pay a small percentage of any transaction fees. These fees are almost always baked into the price of everything you buy. If you’ve ever gone to a business that offered a cash discount, this is likely why.
There’s also the case of some credit cards costing you an annual fee. But many cards, such as Alliant’s cards, have no annual fee. Even for cards that do charge an annual fee, effectively using their perks can often make it worth your while.
In short, credit card rewards are only able be offered in large part due to the transaction fees merchants have to pay. However, if you’re going to pay the same price regardless of payment method, credit card rewards are a great way to get some of that additional expense back. Just don’t make additional purchases for the sake of earning more rewards.
Truth: This may be true for some people, but there are steps you can take to reduce and eliminate overspending. The most important one is making a budget. Hold yourself to spending a certain dollar amount in different expense categories and it won’t make a difference what method you use to pay.
Without a budget, overspending with a credit card can happen easily for a couple of reasons. Paying with credit means you don’t need money in your bank account to buy something. In other words, the “how am I going to afford this?” question can be answered after the purchase is already made.
There are also psychological elements at play. With a credit card, all you see when making a purchase is some numbers on a screen displaying the purchase price. You swipe, insert or tap your card and that’s that! Meanwhile, paying with cash forces you to count out and physically hand over currency. While this argument is often used to dissuade credit card use, the same reasoning also applies to debit cards.
Being aware of these tendencies and proactively making and holding yourself accountable to a budget will help your spending remain consistent across all payment sources.
Truth: No matter your feelings on credit scores, building your credit and obtaining a good score can pay off in huge ways throughout your life. Unless you’re able to pay for large expenses such as your house and car completely in cash, a good credit score will be indispensable.
A good credit score will give you access to better rates and terms. Some lenders also choose to simply not work with individuals with lower credit scores. Additionally, a good credit score is often required when renting an apartment and on other financial applications.
If you’re apprehensive about opening a credit card but still want to build your credit, one idea is to get one credit card and set up a couple recurring purchases you already make on it. For example, you could set up your phone bill and internet bill to be paid for with your credit card and otherwise not use it. This would still boost your credit score quite a bit long-term!
Truth: There’s no magic number of credit cards you should have. For people that know they struggle with impulse purchases and debt, opting to have no credit cards at all may be the best choice. On the other hand, someone who meticulously tracks their finances and wants to maximize credit card perks may want a handful of credit cards with benefits that complement one another.
When evaluating if you should get another credit card, always consider the potential impact to your credit score. Applying for a new credit card typically creates a hard inquiry into your credit history. Having too many hard inquiries can temporarily reduce your credit score. After a while, however, demonstrating that you can responsibly use a greater amount of available credit can actually increase your score.
Finally, having credit cards from more than one credit card network, such as Visa, Mastercard, American Express and Discover, can be beneficial. Some merchants only take cards from certain networks, so having multiple makes it unlikely you’ll run into an issue when it comes time to pay. This is especially true when making an international purchase.
If you’ve been given mixed signals on credit cards in the past, knowing the truth behind some of the most common myths and misconceptions can put your questions to rest. Always remember that while credit cards are a great tool when used effectively, it’s important to evaluate your own financial situation to determine the best choice for you.
Want to learn more about credit cards? Check out these articles:
Debit card or credit card? Yes! By Suze Orman
Should you get a rewards credit card?
When is your credit score pulled?
Ben Heinze is a marketing content specialist with a passion for financial education. Instilled with a strong sense of frugality from a young age, he views money as a means to building the life you want, rather than an end in itself. From reading Money Mentor, he hopes you discover new ways money can be used to build your ideal life - whatever that may look like.
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