August 3, 2016
Financial Safety
Financial Safety
While reading through a number of financial advise columns and journals, I often read a recurring theme, the idea of shredding your credit cards. People often discuss about incurring debt far in excess of what they earn, such that interest payments alone was taking up a sizeable chunk of each paycheck. And as the interest payments add up and spending is not reined in, then people get stuck in perpetual debt, never earning enough to dig there way out. However I got to thinking, are credit cards all bad? Are they really a bane on society, that we would all be much better off without? The conclusion I have drawn is an absolute 'NO'.
I will preface all this by saying that if you do not have a budget (I have examples of budgeting techniques in a previous post), then you should not have a credit card. If you are going to carry a balance then you should not have a credit card. The high interest rates on most credit cards will contribute to keeping you in debt for longer than you have to and if it is not something you can afford at this very moment, then you really should consider not buying it. But if you have a disciplined budget and pay off your cards at the end of each month to avoid accruing interest, then there are a few benefits to having a credit card.
Cash Back
Often times the biggest factor that separates a credit card from cash or even a debit card is the Cash Back Reward. The Cash Back Reward returns a percentage of each purchase back as cash. The reward can typically range anywhere between 1-5% and on occasion may squeak up higher. I would recommend getting yourself a simple to use cash back cards such as the Citi Double Cash Back card which gives you 1% when you make a purchase and another 1% when you make a payment (2% total). 2% may not sound impressive but try considering it next to a savings account. Even the best savings accounts right now are offering near 0% return on money, the best one I can find offers only around 1%. The Citi cards allows you to double that return each time you swipe your card. Again don't swipe that card unless you have the money available at this very moment. If you are able to time your purchases such as during a 5% cash back bonus period for the Discover It card, then you can redeem even more from your purchases. 5% is 5 times higher than most savings accounts, more than sales tax is some states, and is pretty close to what some people get from picking stocks. Plus this is actual returns, and you are not taxed on this reward. Let's assume you had $100 available and you want to buy a $100 item. If you paid with cash, you will be left with $0. If you paid with the Citi card you will get 2% back meaning you are left with $2. And if you wait for the Discover bonus period, then you can have $5. Repeat this with every purchase and every meal and your cash back can really add up. If you are afraid that having cash back will only spur you to spend more then consider moving your cash back rewards to a savings account. At that point you would not have to worry about returns on investment and you can think of that savings as money you would have lost if you had paid cash. (although I possess these cards used in the example, I received no compensation for writing this article).
Often times the biggest factor that separates a credit card from cash or even a debit card is the Cash Back Reward. The Cash Back Reward returns a percentage of each purchase back as cash. The reward can typically range anywhere between 1-5% and on occasion may squeak up higher. I would recommend getting yourself a simple to use cash back cards such as the Citi Double Cash Back card which gives you 1% when you make a purchase and another 1% when you make a payment (2% total). 2% may not sound impressive but try considering it next to a savings account. Even the best savings accounts right now are offering near 0% return on money, the best one I can find offers only around 1%. The Citi cards allows you to double that return each time you swipe your card. Again don't swipe that card unless you have the money available at this very moment. If you are able to time your purchases such as during a 5% cash back bonus period for the Discover It card, then you can redeem even more from your purchases. 5% is 5 times higher than most savings accounts, more than sales tax is some states, and is pretty close to what some people get from picking stocks. Plus this is actual returns, and you are not taxed on this reward. Let's assume you had $100 available and you want to buy a $100 item. If you paid with cash, you will be left with $0. If you paid with the Citi card you will get 2% back meaning you are left with $2. And if you wait for the Discover bonus period, then you can have $5. Repeat this with every purchase and every meal and your cash back can really add up. If you are afraid that having cash back will only spur you to spend more then consider moving your cash back rewards to a savings account. At that point you would not have to worry about returns on investment and you can think of that savings as money you would have lost if you had paid cash. (although I possess these cards used in the example, I received no compensation for writing this article).
Safety
Credit card purchases are much safer than cash. If you had to go to the store and someone robs you of your credit card, then no worries the card is replaceable. If someones robs you of your cash, then even if the police catches that person, it is unlikely you will ever see that money again because it would have been spent or stashed away. There is always the chance that someone may steal your credit cards and spend frivolously but you are not responsible for those transactions and you will get your money back.
Credit card purchases are much safer than cash. If you had to go to the store and someone robs you of your credit card, then no worries the card is replaceable. If someones robs you of your cash, then even if the police catches that person, it is unlikely you will ever see that money again because it would have been spent or stashed away. There is always the chance that someone may steal your credit cards and spend frivolously but you are not responsible for those transactions and you will get your money back.
Portability
Credit cards are by far much more portable than cash which is especially important if you are making a big purchase. Have you ever tried to buy a new laptop using $20 bills? It does not fit neatly into your wallet. Also what about getting change when something cost $5.01 or $7.25. You are left with a pocketful of metal which jingles around alerting passerby's that you have money on you. You might only be able to convince them that noise is coming from your keys a couple times. Plastic is just so nice and sleek in these situations.
Credit cards are by far much more portable than cash which is especially important if you are making a big purchase. Have you ever tried to buy a new laptop using $20 bills? It does not fit neatly into your wallet. Also what about getting change when something cost $5.01 or $7.25. You are left with a pocketful of metal which jingles around alerting passerby's that you have money on you. You might only be able to convince them that noise is coming from your keys a couple times. Plastic is just so nice and sleek in these situations.
If you cannot keep a disciplined budget or pay off your full bill then you should not use a credit card. But if you are able to, then the cash back reward, safety, and portability may convince you to use plastic.
Yes, plastic is convenient if you don't carry a large balance, and as you say, much safer for large purchases. It would be crazy to carry hundreds of dollars on you to go out to buy electronics or furniture etc. Debit cards are okay but they frequently won't go through and have daily limits. If your plastic is lost or stolen, the credit card affords more protection.
ReplyDeleteI would still say that if you are going to have a credit card, you should have $0 balance at the end of the month as to not accrue interest. If you have a 0% introductory period, then you should make withdrawals each month from your checking account equal to what it would take to pay off the credit card by the end of the promo period, and deposit that amount into a savings account to avoid spending it. when time is due, you take that money from the savings and pay off the entirety of the credit card bill. That way you can avoid having 20% interest (which is multiple times the return on investing in the S&P 500) simply by budgeting properly.
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