What are the Benefits of Using a Credit Card?
A credit card allows you to purchase goods immediately and pay later. It is a convenient financial tool that can be used for almost any purchase such as groceries, services and travel. If you pay back your amount due on time and in full each month, there is no extra charge other than the amount you spent. However, if you fail to pay your credit card bill on time or in full, you may be charged interest, which gets accrued until the full amount inclusive of interest is paid.
Why use a credit card?
The benefits of credit cards are plenty. One of the main advantages of credit cards is the extra time that you get to pay for the product and service that you purchased. Apart from this, credit cards can help build your credit score, protect your purchases from fraud, and will help you earn rewards in the form of cash back or points that can be redeemed for travel, gift cards, charitable giving, and shopping.
Let us look at four key benefits of credit cards in detail.
1. Credit Cards help build your Credit Score
One of the key benefits of credit cards is that it provides the opportunity to build a credit score when you use your credit card responsibly. This is critical when applying for other important loans such as car loans, extended financing on large purchases such as appliances and furniture, seeking business loans, or applying for a Home Mortgage.
How can you achieve this? Well, a credit card is essentially an open ended lending product that will involve interest payment if you do not pay on time. However, if you pay your monthly credit card bill on time and keep your utilization way below the limit, it shows that you are prudent with your financial obligations and creditworthy. In other words, a good credit score is given to those individuals who consistently pay on time.
How does it work? The credit card issuer will usually report your financial behavior to Credit Bureau Agencies such as TransUnion, Equifax, and Experian. These bureaus use the transactional information about your account to prepare credit reports, which forms the basis of your credit score. To start building a credit score with your credit card, you need to have a credit card in your name. It may be challenging to get a credit card if you have limited credit history; however, you can go for secured credit cards or student credit cards.
A good credit score will help your chances of being approved for a higher credit limit request. This is a welcome cycle, wherein if you can get a higher limit, it improves your credit score because your utilization ratio typically decreases. For more information on building or improving your Credit Score we recommend reading these Plaata articles:
2. Credit Cards offer built-in Fraud protection
Among the many credit card benefits, a reason why one should use credit cards is safety. Unlike debit cards, Credit Cards enables you to minimize or avoid losses that result from fraud. For instance, when an unauthorized person uses a debit card, you lose your money almost immediately from your bank account; it can take time for an investigation before you can get your money back. However, if someone misuses your credit card, you will not need not pay for it immediately. You notify your credit card company of the fraud immediately. You will not be obligated to pay for the fraudulent transaction until the lender finishes investigation and finds a resolution, in most cases in your favor. Credit card networks (Visa, Mastercard) and issuers provide zero-liability coverage for unauthorized purchases.
Another key advantage of credit cards is that you do not have to worry about carrying around a large amount of cash on vacation or to make large purchases. At the same time, if you lose your card, you can always notify your bank to immediately stop unauthorized use and you will get a replacement card very quickly.
3. Automate Paying Bills
Another benefit of Credit Cards is the ability to pay recurring bills automatically. These payments might include utility bills like your phone bill, Internet and TV service provider, electric bill, electronic tolls, train tickets, etc… Often, we fail to pay these recurring bills on time simply because we tend to forget about them before the due date. Credit cards allow you to very easily set up a recurring payment that automatically makes the payment every month. Your card will get charged at the selected date, and you can avoid facing any penalties or disconnection of service.
To pay your bills automatically, all you have to do is set up your credit card for automated payment, it might take a month for the service to start working so be sure you check for ontime payments the first few times. You can often set-up automatic payment from your bank or directly with the service provider’s website. Once your service provider approves the biller, you need to set the instruction to pay off the bill by the credit card company a few days before the due date mentioned in the bill. This way, if there is a failure in the transaction or at the time of processing your bill payment, you will always know before the due date. Also, you can always opt-out of these bill payments and also stop payment a few days before the due date.
Thus far, we’ve been discussing paying off recurring bills automatically using a credit card. Each month, you will then have to pay off your Credit Card bills using funds from your banking account. You may wish to coordinate the date on which your Credit Card payments are due, with the date where other large expenses must be paid, so that they are not all due at the same time. For example, you may want to pay your rent at the beginning of the month, and your Credit Card and Car Loan in the middle of the month. Usually, lenders and utility companies will provide flexibility to adjust your recurring monthly due dates.
4. Other Benefits.
Apart from the benefits of credit cards that we have seen above, there are other advantages credit cards provide. They have attractive offers, cashback based on your spending, reward points that you can redeem later for other products and services. Another advantage that many credit cards come with is some form of insurance on purchases, that may extend a product warranty or provide collision insurance on a rental car.
Credit cards are also particularly handy when the seller does not know the final amount of your transactions, for example, when you are staying at a hotel or using a car rental service. In these cases they keep a deposit on your card, however, you will not need to pay until the final bill is settled. If you had used a Debit Card, that deposit amount would not be accessible in your bank account.
We have seen multiple credit card benefits. However, Using a credit card works best when you remain disciplined, pay your monthly bills on time, and do not spend beyond your capacity to pay back in full each month. Credit cards should not be a cause for impulse buying. Credit cards can be a great financial tool if you use them the right way.
For more information on how Credit Cards work including more details on Rewards, we recommend reading: