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Some people say that your credit score is the only grade that matters after high school, and in some ways, they’re right. There are many pros of credit cards that can make them very helpful tools. This post will show you some pros of credit cards and help you figure out if you should make the switch from debit to credit.
What are the similarities between a credit card and debit card?
A credit card and debit card are both means of paying for goods and services. That’s pretty much where the similarities end.
What’s the difference between debit and credit transactions?
A debit card is directly attached to your checking account, issued automatically by your bank. When you purchase something, the full payment is deducted from your checking account right away. If you don’t have the money in your account at the time of purchase, then you physically can’t make the purchase.
Debit card payments also don’t contribute to your credit score in any way.
A credit card is essentially a 30-day interest-free loan (as my grandfather would say) given to you by a bank. You are using the bank’s money to pay for the purchase, with the promise that you will pay them back. A credit card is not free money. Every purchase you make during the month is tallied up and charged back to you on one bill.
If you don’t pay your bill on time and in full every month, then interest starts accruing on your bill. And since credit card interest rates are absolutely, disgustingly high (usually ~30%), your $500 bill is now $650 one month later. Disgusting. Putrid. Horrendous. This is where most folks struggle with credit cards. Don’t do that to yourself.
The Golden Rules of Credit Cards.
These are the two golden rules of credit cards. If you can follow them unyieldingly, then you can use credit cards.
- Only use a credit card if you can pay the price in cash right then and there. If you don’t have the full amount for something in your checking account, you can’t afford it.
- Always pay your bill on time and in full.
If you’re responsible with your money and can follow the golden rules, then here are 9 pros of credit cards that hopefully convince you to put your debit card away.
9 Pros of Credit Cards (a.k.a. why you should switch from debit to credit)
Building credit history
One of the biggest pros of credit cards is that they start building your credit history, thereby boosting your credit score in the long term. If you ever apply for a mortgage or car loan, lenders will use your credit score to determine a). how much they’re willing to lend you and b). how much you’ll have to pay in interest.
Let’s conjure some imaginary people to play this out. For the sake of this basic example, I’ll use very simplified math with few variables. Let’s say Ashley (lower credit score) and Sarah (higher credit score) both apply for a 3-year car loan of $20,000. Sarah is approved with a 6% interest rate and Ashley is approved with a 10% interest rate.
Excluding other fees and taxes, Sarah pays $21,903.79 ($1,903.79 in interest) and Ashley pays $23,232.37 ($3,232.37 in interest) over the lifetime of the loan. On the same loan, Sarah saves $1,328.58 more than Ashley. Sarah’s monthly payment is lower too, at $608.44 versus Ashley’s $645.34.
This example shows that if you have a lower credit score, then a loan ends up costing you more in the long run.
Protecting your money from misuse or theft
Another way credit cards can help you out is that they provide a layer of protection between your money and folks with nefarious intentions. If someone steals your debit card information and makes a purchase, that money is immediately gone from your account. However, if that purchase happens on a credit card, you can easily dispute the charge with the card provider so you don’t personally take the hit.
Having that extra barrier between wrongdoers and my money makes me feel more secure.
Purchase protection
Let’s say you buy a new camera to take on vacation…and it gets damaged in transit. While that’s absolutely awful, you may be able to at least get your money back. Many credit cards offer purchase protection for a period of around 3-4 months on new purchases,
For example, the no-annual-fee Chase Freedom Unlimited offers “120 days against damage or theft up to $500 per claim and $50,000 per account.”
On the high-annual-fee end, the American Express Platinum offers purchase protection within 90 days when the merchant won’t take it back, up to $300 per item (excluding shipping and handling), up to $1,000 per account per calendar year based on date of purchase.
If the original merchant won’t accept a return, you have a second avenue to explore to get some or all of your money back.
Related: Discover it Card Review: the BEST first unsecured credit card
Travel insurance benefits
One of the pros of credit cards that can save you money (when used responsibly) is that some offer various travel insurances that can cover unexpected costs in certain situations. It’s similar to a “lite” version of full-on traveler’s insurance purchased with a third party, as it’s not as comprehensive but does give you some protections.
To use the Chase Sapphire Preferred card as an example, purchasing your travel with this card provides with the following (quoted from Chase’s website at the time of writing):
- Trip cancellation/interruption insurance – “If your trip is canceled or cut short by sickness, severe weather and other covered situations, you can be reimbursed up to $10,000 per person and $20,000 per trip for your pre-paid, non-refundable travel expenses, including passenger fares, tours, and hotels.”
- Trip delay reimbursement – “If your common carrier travel is delayed more than 12 hours or requires an overnight stay, you and your family are covered for unreimbursed expenses, such as meals and lodging, up to $500 per ticket.”
- Baggage delay insurance – Reimburses you for essential purchases like toiletries and clothing for baggage delays over 6 hours by passenger carrier up to $100 a day for 5 days.”
Typically these travel insurance benefits accompany credit cards with annual fees. (After all, it’s incorporated into the fee.) However, in the rare case where you do need to file a claim, it can end up saving you way more than the annual fee.
Please refer to the full terms and conditions of a specific credit card for complete details on its protections.
Warranty extension on purchases
A nice peace-of-mind feature is that many credit cards will extend the warranty on most purchases. For instance, if you buy a pair of headphones that come with a merchant warranty of one year, your credit card may extend the warranty for an additional year, giving you two years of coverage.
Some of these extensions only apply to U.S. manufacturers’ warranties, and there’s usually a limit on which warranties are eligible. As with everything mentioned in this post, read the terms and conditions of your specific credit card.
Saving money on car rentals with a damage waiver
Some premium cards offer primary coverage for theft and collision damage on rental cars. That means the insurance from the credit card company will step in before your personal insurance policy. While the coverage doesn’t cover every type of vehicle, for many, you can decline the rental company’s collision damage waiver (CDW) and save on your daily rental cost.
Check the fine print of what their CDW offers and what your credit card’s CDW covers to make the best decision for your rental. Also confirm whether the credit card’s CDW is primary (before your insurance) or secondary (after your insurance).
Earning cash back or points on every purchase
Out of all the pros of credit cards my favorite is that, when used correctly, they save you money on everything you pay for. Many cards offer either a points currency or cash back that you earn for every dollar you spend.
Cash back
If you’re after simplicity, credit cards that earn cash back are the move for you. Cash back means that for every dollar you spend, you earn a small percentage of that money back. Your cash back can be redeemed as a statement credit or deposited directly into your bank account.
Let’s look at some of my favorite no-annual-fee credit cards as examples:
Discover it
Earn cash back on every purchase – 5% back on rotating merchant categories and 1% back on everything else.
Chase Freedom Unlimited
Earn 5% cash back on travel purchased through Chase’s travel portal, 3% back on restaurants, 3% back on drugstores, and 1.5% cash back on everything else.
Chase Freedom Flex
Earn 5% cash back on rotating merchant categories, 5% back on travel purchased on Chase’s travel portal, 3% back on restaurants, 3% on drugstores, and 1% back on everything else.
Travel
Travel credit cards are, in my opinion, where things get a little more fun. Unlike cash back where you’re earning straight up money back for each dollar you spend, you instead earn points or miles for each dollar spent. You can then transfer these points out from your credit card to a variety of airline and hotel rewards programs that partner with your credit card company.
These points don’t have a fixed monetary value, so using them can be more difficult because some strategy is required. However, this also gives your points the chance to be way more lucrative than traditional cash back.
Let’s revisit one of my favorite no-annual fee cards:
Chase Freedom Flex
You might be thinking, “Wait, didn’t you just say this was a cash back card?” And yes, it is! But there’s a caveat. Chase touts its cash-back-earning potential in their marketing, but that cash back is technically earned in the form of Chase Ultimate Rewards (UR) points.
Therefore, 5% back on rotating categories is actually 5 UR points per dollar spent on rotating categories. You can redeem those points as cash back or transfer them out to travel partners. Redeemed as cash back, your points are worth 1 cent each. Transferred out to travel partners (strategically), their value can easily jump to 2-10 cents each. So 5 UR points per dollar can easily be 10% back on your money when transferred out for travel instead of 5% back when redeemed as cash.
Therefore if you see yourself using your accumulated cash back towards travel anyway, it may be worth your while to focus on the points and miles side of things instead. I was able to save $850 on a trip to Boston with my travel credit cards. The main point is that you can leverage even more value if you enjoy traveling at least once or twice a year.
Earning more interest in your account before your bill is deducted
If you pay with debit, the money leaves your account right away. If you pay with credit, the money in your bank account has a little more time to earn interest before your bill is paid. While this may only be the difference of a few cents, the concept is still worth mentioning.
Additional merchant discounts
Credit card companies like Chase, American Express, and Citi offer merchant discounts on top of the points/cash back you already earn. You have to manually activate these offers before purchasing in order to use them, but you can save some sweet money.
When I was planning to buy the Sony WH-1000XM5 noise-cancelling headphones anyway, my Chase World of Hyatt card happened to have a merchant offer for Best Buy that saved me an extra $25. That made my decision easy regarding which retailer I’d purchase from.
Over the past few years, I’ve saved a couple hundred dollars across all my cards just in merchant offers.
DON’T FALL INTO THIS TRAP.
What many folks fall victim to is viewing a credit card as free money, and not as a 30-day interest-free loan. They start to spend more money than they make and, because they can’t pay off the full balance every month, they carry a balance and begin accruing interest. At that point, they’re just bleeding money. Any pros of credit cards are negated, and your card is now a weapon against you instead of a tool.
If you carry a balance month to month and continue to purchase on that card, you’re spending money you haven’t made yet. The best rule before purchasing something is: if you don’t have the full amount in your checking account right now, don’t buy it.
If you want to become a credit card person…
Here are some ways you can ease into responsible credit usage by using your credit card like a debit card:
- Start with only using your card for one type of recurring purchase, like gas, and pay it off in full every month. Then you can add a utility bill, and then maybe groceries. Slowly work your way up to paying for every purchase with your credit card. This builds awareness of how much money is going on your card, instead of mindlessly throwing all your money into the void.
- To get in the habit of paying it off, log into your account daily and pay off the card. After a few weeks, pay off the card once a week. If you want to drop down to once a month, you can do that too. Pay at the frequency that works best for you, as long as it’s on time.
- Keep track of your overall spending in an app, spreadsheet, or the good old-fashioned pen and paper. Always know how much money is coming in and how much is going out, and how much is going where. You may be surprised.
Questions
Should I use my credit card for everything?
Assuming you have the money in your checking account to pay the bill in full, then yes. The only exception is if you’re charged a fee to pay with a credit card, which could nix any rewards you’d earn. For example, if your card earns 1% cash back, but you’re charged a 3% fee to pay with a credit card, then you’re losing value. In that instance, it would be better to pay with cash.
Is it better to use debit or credit card abroad?
The best option is whichever card has no foreign transaction fees. While no-annual-fee credit (and debit) options without foreign transaction fees exist, you’ll usually find that perk in credit cards with annual fees, like the Chase Sapphire Preferred. If both your debit and credit cards charge foreign transaction fees, use whichever one has a lower fee.
Outside of the fees, it’s better to use a credit card for the protection against misuse. Whether you fall victim to pickpocketing or happen to lose your credit card from being on the go in a strange place, you can call or chat online with your credit card company to freeze your account. If someone runs away with your debit card and has a shopping spree, once that money’s gone from your account, it’s gone.
Is it better to use credit or debit online?
It’s better to use a credit card, especially if you’re purchasing on communal Wi-Fi without a VPN or the website seems a little suspicious. (Okay you shouldn’t be giving your card information on sketchy websites to begin with, but I’m including it for the sake of argument.) You’ll have more protection in case your card information is snarfed.
Is it good to use a credit card and then pay it off immediately?
This will help keep your credit utilization low, thereby boosting your credit score a bit. Other than that, there are no tangible benefits from paying your card off immediately (ie. before the statement period closes).
However, this can be a fantastic way to build your mindset around credit cards in that you only spend what you have in the bank (after budgeting, of course). Doing this is a great financial habit that will set you up for success.
Overall
Which is better, debit or credit card?
Credit and debit both have their place, but if you’re responsible with money, then my vote is credit all the way. Credit cards have so many pros that can help you build a future and save money. If you’re still uncertain if moving to credit is right for you, honestly evaluate yourself using the criteria below.
You should switch to credit if:
- You’ve never even come close to overdrafting in your life.
- You’re good at sticking to a budget.
- You want to build credit history (for a sweet, sweet interest rate on a mortgage later on, perhaps).
- You never have to worry if you’ve spent your last dollar.
- You never pull money from savings to pay for non-emergencies.
- You’re the friend people come to for financial advice.
- Family members would trust you as an authorized user on their personal accounts.
You should stick with debit if:
- You’re an impulsive spender.
- You never have any idea how much is in your checking account.
- You’re allergic to budgets. (Fix this, please. They’re good for you.)
- You have the mindset, “Live now, pay for it later.”
- You want your checking account to always reflect exactly what you have to spend.
- The idea of a bill accumulating all your monthly charges makes you anxious.
- You’ve already accumulated unnecessary debt.
Learn more about my favorite no-annual-fee credit cards: