Are Credit Cards One of the Most Misunderstood Financial Tools?

The other day, I was out at lunch with a friend when it came time to pay the bill. I put down my credit card, and he put down his debit card. Sparing you the specifics, it sparked a spirited conversation about the benefits and risks of using credit cards, and it gave me an insight into the minds of people who are anti-credit card. That conversation inspired me to write about the benefits of using credit cards, so that hopefully more people can start taking advantage of them.

The concept of a credit card is simple, and I suspect many people already know this, but I’m going to give a quick description for those who might not: You use the bank’s money to make a purchase, and then you are responsible for paying back the bank. For example, let’s say you go to the grocery store, and your total comes out to $100. Instead of having that $100 debited (taken out) from your checking account right away, you swipe your credit card and use the bank’s money. The $100 stays in your account, the store is paid, and now you owe the bank that $100.

So, if you’re paying the same amount, why go through the trouble of involving the bank in your transaction with a merchant?

It’s a fair question, but there are some pretty good (in my opinion) reasons.

First: Rewards

Credit card rewards are an entire niche that people spend hours trying to optimize. I won’t get into the specifics of them, as it’s not the goal of this post, but I could very easily dedicate multiple posts to the topic of credit card rewards. At a high-level, depending on the credit card you have, there are rewards tied to making purchases with it. Generally, people have a credit card that earns them one of two types of rewards: Cash-Back or Points.

Cash-Back cards give you a percentage of cash-back on your purchases. There are different structures for how this typically works. Some cards might have rotating categories where you earn cash-back for spending in that category (gas, groceries, shopping, etc.) during the time that the promotion is active, and it rotates every quarter. Some cash-back cards might have set categories, where anytime you use the card you earn a set amount of cash-back for spending in that category and it never changes. And, lastly, there are flat-rate cards where you earn a set percentage of cash-back regardless of what you purchase (typically a 2% rate).

Points-earning cards are structured similarly, but these typically carry more benefits/perks (credits for services or restaurants, access to experiences, etc.) and obviously earn you points instead of cash back. You can use these points for transferring to airline/hotel partners and using their point redemption system for travel, booking trips through your credit card company’s travel portal, or you can redeem them for cash back. Points can allow you to book travel at a significant discount compared to what you might pay directly out of pocket.

Second: Credit Building

It is no secret that to get approved for things like buying a car or getting a mortgage, you need a credit history. Your credit score – a score that, in theory, reflects your ability to pay back debt – is a major factor in these approvals. When you turn 18, you don’t necessarily have much of a credit history. It is common for young adults to get their first credit card for building their credit history and then upgrading to a better rewards-earning card down the road.

It’s also common for people who have maybe struggled in the past and ended up in a bunch of debt or had to declare bankruptcy to get a card for the sole purpose of rebuilding their credit.

Third: Protection

Have you ever lost your wallet or gotten your card information stolen? With a debit card, when someone spends money from your account, there’s a (lengthy) process to get that money back. It has to go through reviews and a bunch of internal processes before you get your money back. You’re more likely than not going to get your money back (though there are instances where you don’t), but that’s of little comfort to someone who needs that money accessible immediately.

With a credit card it’s a different story. If someone steals your information and starts spending money, you can just freeze the card and report it as stolen. It will still go through a review process and be investigated, but you didn’t actually lose any money. The bank is the one that takes on the risk and the loss if they can’t recover the charges. And while it goes through that review process, you aren’t having your own money tied up.

Wrapping Up

So, in review, credit cards are a powerful financial tool that, when used responsibly, can be a real value-add to your financial picture. They enable people to earn rewards for trips they otherwise couldn’t afford, they offer protection from fraud, and they are a great way to build credit for future purchases like a car or a home.

That said, I feel obligated to add in that if you don’t feel that you can spend responsibly and not spend money you don’t have, then no matter what the benefits are, it might not be for you. While I am a big believer in credit cards and the benefits they provide, they can definitely be dangerous if you know you have a spending problem, as they give you access to spend beyond your means. If you can spend responsibly and generally exercise self-control with your finances, then I strongly encourage you to look into credit cards and see if you can take advantage of all that they have to offer!