Credit cards often get a bad rap.  Many people struggle to overcome credit card debt and are told or learn to avoid credit cards at all cost.  Yet, credit cards themselves, when used correctly, can be a great financial asset. Trouble is, many people don’t know how to properly use credit cards, and so never get to reap the benefits they offer.  If you don’t have any credit card debt, but you’re still not sure how to use credit cards, read on to learn why and how credit cards can benefit you (but if you do have credit card debt, it’s best to pay off your balances before using credit cards regularly for purchases, and Blue Pixel Finance’s financial coaching can help you!)

Credit versus Debit Cards

It’s not uncommon to hear financial advice suggesting people ditch credit cards in favor of debit cards.  Debit cards have a credit card logo (such as Visa or Mastercard) so they can be used where credit cards are accepted, but these cards are tied directly to and deduct money from your bank account.  Debit cards do not allow the user to borrow money (use a line of credit) from a credit card issuer.  While debit cards are great if you are trying to stay away from using credit cards (if you are, for example, paying off credit card debt), there’s not a lot of benefit to using them if you’re not in credit card debt. 

Benefits of Credit Cards over Debit Cards

Here are a few reasons to avoid debit cards in favor of credit cards if you are currently out of credit card debt and committed to using credit cards properly and staying out of debt:

  • Security – Debit and credit card information gets stolen.  When debit card information is stolen and a thief successfully uses your information, the money comes directly out of your bank account.  While you aren’t liable for fraudulent charges, it may take a while to get your money back in your account.  With credit cards, you bypass this risk—you’re not liable for the charges, and the thief doesn’t access money from your account, so you don’t have to worry about waiting for money to be returned to you.
  • Building credit—Debit cards will let you buy everyday items just as credit cards do, but they won’t build your credit.  You’ll need a credit card account and healthy credit line along with a strong on-time payment history to do that.
  • High limits—Debit cards are limited by how much cash you keep in the connected checking account.  Credit cards provide you with a set credit line that’s typically more than the cash in your checking account (though you should have funds set aside in a savings account to cover a large credit card purchase).  If you need to rent a car, book a hotel room, or buy a laptop, it’s usually easier to do so with a credit card. 
  • Pre-authorization holds—Some places (such as a hotel or even a gas station) will put a pre-authorization hold on your card, using up some of the available funds for several days.  This could cause problems if you used a debit card but need to access the cash.  You avoid this pesky problem by using a credit card, as you can still access your cash and the hold goes on your credit card instead. 
  • Rewards Programs – Debit cards don’t offer rewards that many credit cards do.  Whether it’s cash back, points, or miles, you are missing out on offers if you swipe solely with your debit cards.
  • Other benefits—Depending on your credit card, you may also have access to other benefits that your debit card doesn’t offer.  This includes extended warranties, price protection, travel benefits such as additional insurance on rental cars, free global entry or TSA pre-check, airport lounge access, complimentary memberships (such as Shoprunner), or status in certain programs (such as elite status at a hotel chain).     

Three Steps to Using Credit Cards Properly

The above benefits are not worth as much if you’re paying fistfuls of interest payments to credit card companies.  However, if you use credit cards properly, you’ll never pay interest and gain all the benefits above without paying for them.  This is where credit cards become a financial asset (you get free stuff!!) rather than a liability.  Here are the three steps to follow for free benefits without paying credit card companies a dime:

  1. Only charge what you can afford.  This is easier said than done, but the goal here is to simply use credit cards as a short-term loan and earn perks before you pay back the credit card company.  If you can’t afford it, you shouldn’t charge it—you’ll end up paying interest, rack up debt, and the credit card company reaps the benefits instead of you.
  2. Review your credit card statement for key dates.  Typically, billing periods cross over months.  As an example, let’s say you get an email on May 11th, 2019, saying your statement is available online.  Here’s key information related to that statement:
    • Statement date: 05/09/2019 – this is the last day of your billing period and when the credit card company generated your statement balance.
    • Billing period: 04/10/2019-05/09/2019 – this is on your statement; all your credit card charges on or between these dates that clear will be listed on your statement.
    • Payment due date: 06/07/2019 – this is the latest date by which everything you charged during the billing period is due.  It’s usually between 21 and 30 days after your billing period ends.
  3. Pay your statement balance on or before the payment due date.  This is key, and where most people miss out on using credit cards properly.  You will not pay interest if you pay the statement balance in full on or (preferably) before the due date.  You may have other charges that have hit the card since a statement is generated, but those charges aren’t due until the next statement due date.

Here’s an example using the key dates in #2 above:  You charged $500 on your credit card in the billing period from 04/10/2019 – 05/09/2019.  Your statement says that you need to pay $500 by 06/07/2019.  Between 05/10/2019 and 06/01/2019, you charge another $200.  When you log in online to pay your bill on June 5th (a few days before the due date!), you have a few options:

  • Pay the minimum due – (typically a low amount relative to your balance) $25
  • Pay the last statement balance — $500
  • Pay the current balance — $700
  • Pay a custom amount – you get to choose.

What amount should you pay?  Would you pay $400?  $500?  $700?  This is where it can get tricky for many people.  The answer: You must pay at least the statement balance on or before the due date.  In the example above, you must pay at least $500 to avoid interest and reap the benefits of using your credit card.  If you’d like to pay the current balance ($700), or anything over the statement balance ($500), that’s perfectly fine.  However, paying the minimum due ($25) or anything less than the statement balance (for example, $400) will cost you money and you’ve lost benefits.  Avoid this at all cost!

Once you’ve mastered the three steps above, it’s time to start looking at the credit cards you use and determine what rewards are most beneficial to your lifestyle.  We’ll look at some credit card rewards programs in another blog post.  Stay tuned!