Many people that are just starting off to properly manage their finances often see the advice to avoid credit, especially credit cards, and use money in their bank accounts to pay for stuff. This advice is only true if you don’t use credit cards properly. Used correctly, credit cards have many advantages. In this article, I will describe my top 5.
Before we begin, there is one important point to make. In order to use credit cards correctly, you must never pay 1 cent of interest on them. To do this, you must always pay your full statement balance before your due date and avoid ANY cash advances. If you are unable to do so, stay away from credit cards. Do not buy anything with your credit card unless you are 100% certain you will be able to pay it before the due date. This is the key part of taking advantage of the credit card’s benefits. Accumulating high interest rate charges will quickly outweigh all of the benefits.
With that point out of the way, here are the top 5 benefits of credit cards:
- Reward Points / Cashback
Reward points or cashback is the biggest advantage. Many credit cards will pay anywhere from 0.5% to 3% reward points/cashback for the purchases that you make. If you manage to pay most of your annual expenses with a credit card, this can really add up to a reward of high value by the end of the year. The key formula to consider is Expected Annual Reward Benefits – Annual Fees. Select the credit that offers the highest value from that calculation. This will differ for everyone depending on the amount and type of spending you accumulate during a given year. Cashback calculations are simple, estimate spending X cashback rate then subtract your annual fee. For reward points you must determine the estimated value of a point. The best reward points out there have a value of more than 1 point per dollar spent.
My personal preference is the TD Visa Infinite Aeroplan card. I accumulate Aeroplan points quickly with this card and then get to use them to book flights. I can accumulate 1-3 points per dollar spent and when redeemed for flights within North America, can get a value of 2-3 cents per point. As I enjoy taking vacations regularly, this works out to about 2-9% cash back if fully optimized.
2. Credit Card Protection Benefits
Credit cards also offer consumer protection benefits. Travel credit cards tend to offer travel insurance benefits or trip delay coverage. Almost all credit cards offer fraud protection. Certain cards will also offer additional coverage for rental cars, avoiding you needing to take the expensive extra insurance with the rental agency. Be sure to check out the benefits of several credit cards before deciding. Consider which protections will benefit you the most for your lifestyle.
3. Tracking your Finances
All credit card transactions are recorded with your bank. You have access to all of these transactions through online banking and most banks allow you to import them into the software of your choice, including Microsoft Excel. This allows you to track and monitor your expenses, an important part of managing your budget. Spending cash every month results in you not knowing where everything went. How do you improve your spending habits if you don’t know where all the money is going? I strongly recommend you review your credit card transactions (and all transactions) at least once a month. This will ensure there is no fraud or errors in the charges. As you review the transactions, you can also categorize them at the same time. Then with the software or service that you are using (see making a budget for details), you’ll be able see your spending trends. You can then optimize your spending habits.
4. Free 30 day Loan
Transactions on credit cards are interest free as long as you pay them by the statement due date. The exception to this is cash advances. While on average, this interest free loan works out to be 30 days, be sure to check when exactly your actual statement due date falls. You need to be very careful while taking advantage of this 30 day loan. Do not buy anything that you risk not being able to pay for by the due date. In fact, you should already have the money in a high interest savings account ready to off the credit card. A few days before the due date, you can transfer it over to pay your credit card maximizing the interest that YOU accumulate. By the end of the year, the interest gain can be almost 50$ for those who spend about $5,000 a month on credit cards, even considering today’s current low interest rates on savings accounts.
5. Avoid Having a Ton of Change
Spending actual money results in getting a handful of coins for every transaction. This is inefficient, especially for men who have small wallets and no purses. Change is heavy and uncomfortable. It can get lost falling out of your pocket and it’s a big waste of time to hold up a cashier’s line digging through your change to find that last nickel. Avoid all this with a quick swipe or tap of the credit card. The grocery store line up behind you will also be thankful for this benefit.