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Credit Cards or No Cards
I have very few rules in life that apply to every situation, as life is permeable, and things are not static. Golden laws rarely govern every situation, and caveats remind us not to take things too seriously. However, one rule I abide by is never paying by debit card; I only use credit.
But Mile High Finance Guy, XYZ Guru told me that credit cards are evil!
No, credit cards are not evil; personal spending habits can lead to trouble, but that is where self-restraint comes into play. I am not here to argue the moral dilemma of credit cards and how they increase costs on cash buyers or how they eat into small business profits. Instead, I will highlight credit card benefits and using them for gaming the system that we partake in daily.
For those asking themselves why an investment blogger is posting an article on credit cards, the answer is because they allow you to invest more when used correctly, meaning you can reach your financial goals sooner!
To add credibility, I am not including any credit card referral links in this post. I have no gain if you listen to my opinion; instead, I get to write about something I firmly believe, which for me is entertaining. I do not need to make a commission at the expense of empowering you today; I am enthusiastic enough to ramble on this subject for hours.
Importantly, you should only use credit cards to cover purchases that you have the cash to pay off. Please do not spend money that you don’t have; credit card interest rates will drown you in debt, so do not do it.
Now, without further ado, let’s begin.
Why I use Credit Cards
When growing up, I received my first plastic swiping device in the form of a debit card. I thought this was the neatest invention; I could go anywhere and access my funds at any time! Little did I know that others were using similar cards, but their purchases cost them less!
How in the world is it that I could be paying full price when others were not? The answer is cashback. What is cashback? Simply put, it is a rebate that your credit card provider offers you on purchases.
See, back in the day, not every credit card had rewards associated with it. But in the subsequent decades of credit card competition, an arms race has ensued where issuers want to slurp up customers. Thus, they have decided the best way to do this is through generous rewards and signup offers, which can reward those with financial discipline.
See, every time you swipe your credit or debit card, the retailer that you are purchasing from pays a fee to your card provider; this fee is for the privilege of accepting digital payments. Banks used to pocket the entire fee, but oh, how the times have changed.
Hence, cashback is now commonplace.
Now, the beauty of cashback and competition is that many cards offer generous rewards on every purchase. Unlike traditional rebates, cashback has no blackout dates or hoops to jump through; it is earned effortlessly through swiping.
If you have the choice to pay 98% or 100%, which are you going to choose? Precisely, 98%. Debit cards do not reward you for your spending habits traditionally; rather, they act as a facilitating mechanism for the purchase. But debit cards have two significant downsides over their credit brethren.
When you use your debit card, and someone steals your account information, your money gets stolen. Have bills to pay? That is unfortunate; your $0 bank account doesn’t care.
By using a credit card, if someone fraudulently accesses your account to go on a spending spree, your bills will still get paid. You no longer have to wait for the bank to investigate and redeposit funds to your account; this reason alone should be enough to deter debit card spending!
When you fill up at the gas station or go to a retailer, many merchants will preauthorize your card. Preauthorizations are the merchant and your bank talking electronically, confirming that you have the funds to spend. As a result, until the transaction completes (usually days later), your funds that were preauthorized are frozen! Talk about a bad deal for you; this locks up money that otherwise is yours!
For example, gas stations regularly preauthorize my credit card for $100 when I fill up my car, which rarely costs more than $30 to fill. If I were using a debit card, I would be allowing these merchants to hold my money hostage and be receiving no interest payment from them for the privilege!
What type of credit card should I choose?
The average person should find a credit card that offers cashback rather than airline or hotel miles. Why? Because you can apply your rebates towards anything, not what the credit card company decides to allow.
The best type of cashback cards offer 2% or more on every purchase, with no annual fee. However, for those willing to jump through hoops, sometimes paying a yearly fee can be worthwhile. While this latter method does require active effort, you can use multiple cards from one company to create a cashback stream that no single card can rival.
Example: I use Chase’s personal and business credit cards, and by pairing them together, I earn a minimum of 2.25% back on every purchase. Many of my purchases earn even more than this, offsetting the fee pay yearly and then some!
While I could discuss credit cards at length, likely for many paragraphs to come, I will stop here. Chime in using the comments below to ask me any specific questions you have or give me your thoughts. As always, have a great day!
Mile High Finance Guy
finance demystified, one mountain at a time