11/16/2012 7:00 PM ET|
Should you pay bills with plastic?
Using your credit card can be a smart move if you're earning rewards, but there are also risks. Before you charge, make sure it's the right move.
When Beverly Harzog's dog needed surgery in August, she paid the $1,086 veterinary bill with her rewards credit card.
"I figured I might as well get a little bit back on it," says Harzog, a credit card expert, author and consumer advocate from Atlanta. A little she did -- 1% cash back for a $10.86 reward.
Harzog advocates paying for your purchases and recurring bills with your credit cards whenever possible to reap the rewards.
But her credit card advice comes with a huge caveat: Pay your bills with credit cards only if you pay your balance off in full each statement. "If you pay interest on your balance, you don't make money even with the rewards you can earn," she says.
MSN personal finance columnist Liz Weston couldn't agree more: "Paying your bills with plastic is a good strategy but only if you pay your credit card bills off in full each and every month. Otherwise, you're paying unnecessary interest, and that's just dumb."
Technology makes credit cards easy to use
Thanks to technology, you can pretty much buy or pay for anything with credit cards. There are exceptions, of course. Most mortgage lenders won't let you make your monthly payments with a credit card because they don't want to pay merchant fees. And most brokerage firms, even online brokers, don't let you buy stocks with credit cards. They want your real money -- skin in the game, so to speak.
Still, you can charge everything from your monthly electric and mobile phone bills to your groceries and back-to-school shopping. Put it on a credit card and you can pile up some great rewards along the way.
Credit card issuers like when you use their cards to pay your bills because they earn merchant fees, Weston says.
Perks of paying with plastic
In addition to accumulating rewards, here's why you might want to use plastic rather than cash at the register and for recurring bills:
- The more you spend, the greater the perks. Once you hit certain spending thresholds on your rewards credit cards, you may qualify for additional perks or benefits, says Amber Stubbs, the managing editor of CardRatings.com. For example, she says, with hotel rewards credit cards, once you spend enough for elite status, you qualify for automatic room upgrades, concierge services, free Internet access and free breakfasts. Stubbs and her husband are hoping to have enough rewards on their American Express Starwood card that when they travel to Europe their hotel stays will be free.
- You have backup. "You get a middleman to help with any disputes that may arise with billers," Weston says. When the purchase or service is on a credit card, if you're unhappy with it for any reason, your credit card company can help you work out your dispute with the merchant.
Pitfalls of paying plastic
And here's why you might want to be cautious about paying all your bills with credit cards:
- Charges can affect your credit. If your monthly charges put you close to your credit limits, you could harm your credit scores. "Credit card purchases push up the amount you owe compared to your available credit," Weston says. "And that can be bad for credit scores. To have good scores, you need your credit utilization to be below 30%; below 10% is best." If you're applying for a mortgage, a car loan or insurance, you probably don't want to be spending a lot of money on your credit cards just for the rewards, Harzog agrees.
- Plastic is easy. People tend to be a little more lax about their spending when they put purchases on their credit cards rather than paying with cash or a check. "When you're standing at the register, you should ask yourself: 'If I were paying for this in cash, would I still buy it?' If the answer is no, reconsider," Stubbs says.
- You need to be more diligent. You must check your credit card statements with extra care to catch any problems. Most people tend to be more casual about checking their credit card statements than they are about checking their bank statements or balances, Stubbs says. If you're not careful, you could be billed for a service you're no longer getting, Weston says.
- The rewards can change without notice. You may have your eye on a great reward -- a free vacation or a free flight -- and before you have saved enough points, the program changes and it's no longer an option. There's not much you can do about that, Harzog says. Studies show that about a third of rewards points get tossed in the trash, she notes. If you're putting all your bills on your credit card for that special reward, keep track of your balances and don't let them expire. Harzog keeps track of her rewards with a spreadsheet, just to be safe.
Settlement could change landscape
Thanks to the recent settlement in the government's antitrust lawsuit against Visa and MasterCard, retailers can charge higher prices to customers who pay with credit cards.
It's not yet clear what impact, if any, the surcharges will have on credit card usage and rewards points.
The settlement requires credit card issuers to temporarily reduce the interchange (aka swipe) fees they charge merchants for processing credit card transactions. Credit card issuers also can negotiate collectively over future interchange fees.
Weston sees two possible scenarios as a result: Credit card issuers could make their rewards programs less generous to make up for their loss of interchange fees. Or they could try to improve their rewards programs to prevent people from switching to other payment methods because of the surcharges for using them. Weston says it's too early to tell which is more likely.
More from CreditRatings.com:
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Now we charge with a credit card and some big bank on wall street gets 2 % of the purchase. Really for nothing. Now multiply that by millions of transactions and lo and behold Billions of dollars that use to help my local community now go to a big wall street bank so they can pay tens of millions to their ceo and can use the rest to invest in wacky new derivatives, and to pay for lawyers to dream up new ways to take our money.
And, yes I know that it's more complicated than that, so no need to make sarcastic posts. The idea is that using credit cards gives our money to the big banks, they skim money off of every transaction, a penny here and there until they end of with all the money, they do the same with our IRA's, our mutual funds, our state and local and federal bonds, etc etc etc......I don't use my card if I don't have to, just like I don't shop at Walmart because of the way they treat their workers. On a local level I don't go to Upper Crust Pizza because of the way they treat their workers.
If you want change you vote with your wallet.
Another 10% are disciplined in General but get so used to using a credit card that when a huge bill comes up they will pay with credit card with the excuse well I don't have enough money.
That is why everyone should have saved enough for an emergency. The trouble starts when paying off that huge bill, with interest. From there on it takes a very long time to get out of that rut.
Myself I never used a credit card until I reached age 37, same time the rewards came into the scene, now I pay everything except food and restaurants with a credit card. It's a nice way to keep track of spending especially since banks don't return cancelled checks. My monthly credit card bill ranges from $600 to $1600 average, therefore the rewards are absolutely wonderful. And my household debt is zero, that includes cars and home, debt free. Non use of credit till the age of 37 was a large contributor to the road to success.
My father was the one who wanted me to get my first credit card about 35 years ago, in order to build up a good credit score. (Thank you, Dad! He also taught me to pay my bills on time, to be sure I DID earn a good credit score. I got a card about 20 years ago that gives me 2% back on every dollar. It really does add up. Over the past 20 years, I've earned many thousands of dollars. I can't help it that the credit card companies charge the retailers. They would do that anyhow. But since the system has been set up, I might as well enjoy the benefits, which are available to anyone with enough self-control to buy only what one plans on buying and paying for it before the due date.
Finally, one really great benefit of using plastic (that the article missed) is that I don't have to carry large amounts of money on my person (which can be dangerous these days), and that if I happen to find an unexpected bargain (that I CAN afford), then I don't have to be concerned about whether or not I have the funds physically on me.
As for whether or not the rich or poor use them, I can't speak for everyone, but the Lord's blessed us financially, and most of my wealthy friends use them, too (but more judiciously than most folks).
We put everything, and I mean everything, on plastic. Pay it off, IN FULL, every single month. This year we took a 10 day Alaska cruise, paid in full by points, and next spring we're going to Machu Picchu for a nice get-away, again all free.
This only makes sense if you pay the card off every month. Just 1 or 2 months of finance charges wipes away any kind of savings. That goes without saying. Yes we live beneath our means, and have all our lives. But we do live a very comfortable life and want for nothing. Just know the difference between wants and needs, and keep your wants within reason.
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