1/21/2011 12:10 PM ET|
6 reasons to keep using credit cards
If you've chosen to stop using your cards, it might be a good idea to revisit that decision. Shunning plastic may be more costly than you think.
More than 8 million people stopped using their credit cards last year, according to a TransUnion analysis. If you're one of the people who voluntarily stopped using credit, you might want to rethink that decision.
First, some background. The ranks of U.S. residents who didn't have or didn't use a general-purpose bank-issued credit card swelled from more than 70 million in 2009 to about 80 million in 2010, There are several factors driving this trend:
- Some cardholders were cut off. Credit card issuers lowered credit limits, shut down inactive accounts and closed accounts with delinquent balances in what are known as charge-offs. (Much of the drop in credit card debt seen since the start of the financial crisis is due to charge-offs.)
- Some were ticked off. All the limit cutting and rate raising made a lot of people justifiably cranky, and some vowed to stop using credit cards.
- Some just soured on credit cards. Many people prefer the discipline of using debit cards or cash to manage their spending, particularly in these tough economic times.
I'm all for responsible spending and a big hater of credit card debt. If you're one of those people who literally cannot control his or her spending and would go nuts with an open-ended credit card, then I salute your decision to go on a cash-only basis.
Most people, though, can learn to responsibly handle credit cards. "Responsibly" means charging only as much as you can pay off in full every month, and then doing so -- each and every month. Carrying a balance is just dumb.
Why bother with credit cards? There are plenty of reasons to have and use plastic, including:
- Credit cards help your credit scores. You don't need to carry a balance to improve your scores, and you don't want to use more than a small portion of your credit limits (30% is good, 10% or less is better). But having and using a major credit card or two can help you rehabilitate troubled credit scores and keep good scores high. Good scores help you get good rates on major loans and lower rates on insurance, in addition to access to the best credit card rewards programs. Debit card use doesn't help your scores, and neither does cash.
- Credit cards offer consumer protections. If you have a dispute with a retailer or service provider, your card issuer acts as a middleman to help you either get what you paid for or get a refund. Many cards offer other perks, including purchase protection that replaces items that get lost or stolen, extended warranties that double manufacturer's warranties, rental car coverage and travel insurance.
- Credit cards offer safer automatic bill payment. I love the convenience of paying bills automatically, but there aren't many companies I trust to dip directly into my checking account. Enter credit cards, which allow me to charge a variety of monthly bills. I can settle them with one payment, turn to the card issuer if there are any disputes and get rewards points for every dollar I spend.
- Credit cards offer protection against identity theft. If an identity thief uses your credit card, it's typically no big deal. As long as you report the bogus charges within 60 days of your account statement, the transactions are typically erased, and you're issued a new account number. If a thief gets your debit card number or check information, your account can be drained before you know it, and you often have a wait to get your money back.
- Credit cards can help in an emergency. It's a running joke that people get credit cards for "emergencies" and then decide that a dinner out or a great sale qualifies. In reality, though, a card can help you manage many of life's setbacks. (See "Saved by plastic: 5 true credit card rescue tales" for some examples.) And while nothing can really replace an emergency fund, using a credit card is better than turning to a payday lender or other high-rate source of funds if you face an expense you couldn't otherwise pay.
- Credit cards reward savvy users. Rewards programs such as cash-back cards tempt many users to spend more on the cards and carry more debt. A Federal Reserve Bank of Chicago study found that in an average month, a customer using a 1% cash-back card got an reward of $25 but spent an additional $68 on the card and increased his debt by $115. Interest on credit card balances would more than wipe out the benefit of any rewards.
But savvy users know not to carry balances, so they get their rewards for free. In addition to cash back, they can get free and discounted airline tickets, as well as free hotel rooms, gift cards and merchandise.
Again, I'm not advocating credit cards for those who can't control their spending. For these people, a credit limit of $1 is too much and $1 million is not enough; there's no such thing as a credit line they can't misuse and max out.
Then there are the folks who have more self-control but simply don't want to tempt themselves. If that's you, I'd encourage you to consider setting up some automatic charges to your cards, with an automatic payoff each month, so you can keep your cards active and working for you without risking ruinous debt -- or being shut off from credit you may need.
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
VIDEO ON MSN MONEY
Using credit cards is a way of life for 90% of the public, and they are the ones who will hit bottom first when this economy nose dives. Credit cards are responsible for all the short comings of the economy and no one wants to admit it.
My self and my family own everything out right. We live by the old american way. If you cant afford it , do not buy it. credit cards create the illusion that you can afford it, The truth is YOU CANT!
I wake up every morning with out owing anyone any money, except for my mortgage "almost paid off " I think if the country got back to this way of thinking , it would weld back together financially!
After being held hostage by my credit cards for over 40 years, I can tell you there is no feeling more gratifying then the one you'll experience after freeing yourself from them permanently. I could care less what my credit score was, is or will-be, my plan for the rest of my life is to live within my means, have a few bucks in the bank for emergencies, and adjust to my new credit card free existence. It's been 10 months, and I have never felt more alive. BTW, 1 of the 4 cards I owned dropped my cap from $19,000 down to $500 after I paid it off; and another dropped me down from $20,500 to $500. I wrote them each a letter, and told them to just cancel my cards, since I have no intention of ever using them again.
I'm sure people have two things in mind when they read your article.
First, how much did the credit card companies pay you to write it, and second ARE YOU NUTS?
Liz, your article just points out exactly why we need credit reform in this country: as long as credit scores are the goal, people are going to be carrying debt they don't need. If your goal is to raise your credit score, and you can only do that through spending, guess what? You're probably going to spend on stuff you don't need. It is absolutely 100% nonsensical that someone who never carries debt is seen as a higher risk than someone who does. How is someone who charges their cards but pays them off every month better than someone who pays for their needs with cash???
How about a credit rating that gives the benefit of the doubt to people who have good savings, a good history of paying bills, and a steady source of income rather than dinging them because they don't feel like paying for stuff they don't need with plastic?
This article can't be for real.
#1. "helps w/credit scores"?! This is just a credit card companies(banks) keeping you in the vicious cycle.
#2. "safer automatic bill payments"- my bank account offers this & it's just as safe.
#3. "identity theft"- BofA notifies us of transactions to our accounts that our out of our norm.
#4. "help in an emergency" That's what your debit/visa is for. Have $$ in the bank. It's cheaper in the long run w/out paying interest.
Nope. Paid off my credit cards don't want them anymore. Stepped off the vicious merry-go-round. Will only have a car payment (which I also paid off) & a mortgage......someday!
Why would you encourage using credit cards? I just got charged a cash-advance fee on a normal credit card merchant transaction. I called Citibank and they insisted that they can interpret any transaction as a cash advance, even if technically it was not. I called the merchant and accused them of somehow processing a cash advance. They said this problem is new and has just started. They put me in contact with the credit card processing company. They sent me the communication logs which clearly show, no card present, phone merchandise transaction, not eliable for cash advance status. Yet, still Citibank has decided to charge me the cash advance fee and higher interest rate on that charge.
So, MSN, tell me again why I should use by Citibank credit card more for normal everday purchases.
Why is this author still allowed to write articles? She is just trying to take the average consumer into debt they can never recover from. I have not found one of her articles offering any constructive advice, only reinforcing the downward spiral the economy is in. My advice would be to do exactly the opposite of what Liz Weston says.
Copy and paste the link to an interview with creditcards.com about her book. Tell me she isn't a spokesperson of credit card companies after reading that!
You don’t need a credit card for any of the 6 reasons mentioned in this article.
Credit cards help your credit scores. When you save your money you don’t need to worry about credits scores for example you want to but a $23,000.00 car. Instead of buying it with a credit card you save up for it and pay cash! You don’t need credit cards that offer consumer protection when you have a problem with a retailer. You pay cash for your item, you take it home it doesn’t work or you change your mind you take it back to the store and you get your money back or you change it that’s how it works even if you buy it on the internet. You don’t need a credit card for that! Credit cards offer safer automatic bill payments. You don’t need a credit card for that. You go to your bank or credit union and they will help you set up your automatic bill payments or you can go online to do it and it’s just as safe as credit cards. Credit cards are the number one item when it comes to identity theft. If you don’t have one you don’t need to worry about that. Credit cards can help in an emergency. One thing people don’t do is save for emergencies. Sure right now you’re in pretty good health, your car is running fine, no problem with that big screen TV but one day POW something bad happens. So I suggest to everyone out there open a separate account at your bank or credit union, make an allotment for what ever amount you can afford and forget about it! Do it as soon as possible and don’t procrastinate! When the time comes the money will be there. Also, make sure you have health insurance and that it covers every health issue you can think of. So, in the long run you don’t need credits cards for an emergency do you? Credit cards reward savvy users. Well, you don’t need credit cards for cash rewards because you save your money and you pay cash for everything you want and you know you have lots of money left over to spend on other things if you want to. Now, if your spending is out of control get credit counseling. Depending on what state you’re in and your income you can get counseling for free. Remember this important rule before you leave your home for that shopping spree check your bank account first!! One other thing to remember when you use a credit card that is borrowed money. I repeat. That is borrowed money! It’s not yours so you have to pay it back! When you save your money there’s no paying anything back, any interest rates and late fees to worry about. You might be saying, so what? No big deal! Then I tell you this: you are addicted to plastic just like the person who wrote the 6 reasons to keep your credit card. One day you’re going to see how addicted you are when something bad happens. So, to everyone out there if you want to buy that hot new car, take a trip to Paris or buy that great sound system or that big screen TV then SAVE YOUR DAMN MONEY!
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