Many people, including those who give financial advice, believe that credit cards are dangerous devices that simply prey upon people who don’t understand what they’re doing. And to some extent, this is true. But it’s important to realize that if you have a little knowledge and self-control, you can actually get lots of benefits from them, including discounts, cash back, extended warranties, consumer protections, and more, often without paying a single cent! Credit cards are NOT evil. They are a tool. Just like a knife, you can cut yourself if you don’t know what you’re doing, but in the right hands, they are incredibly powerful.
The Basics
A credit card works similarly to a debit card when paying for stuff—you can swipe, tap, or use a chip in most physical locations (though you may be asked to sign your signature rather than enter a PIN in some cases). Using them online is the same too; you just enter the info that the site/app asks for.
The main difference is in how you pay. With a debit card, the money comes directly out of your bank account. But with a credit card, you don’t pay until later. When? Well, every month, the bank tallies up all your transactions into a monthly statement. The total of everything you owe up to that point is called the statement balance, and you have a couple weeks after receiving the statement to make a payment from your bank account. If you pay the entire statement balance, then you don’t end up paying any interest! It’s almost as if you used a debit card—the money just came out of your account a few weeks later than normal.
But you don’t actually have to pay off the entire statement balance, only the minimum payment, which is often less than $50. But be warned: anything you don’t pay off by the statement’s due date starts accruing interest, and usually at a very high rate (like 10-30% annually). Both the leftover balance and the interest are added to next month’s statement, where they can accrue yet more interest if not paid off in full. This means that if you ever get into a situation where you can’t pay off the entire statement balance, it can very quickly snowball into gigantic credit card debt that can be very hard to get out of. More on that later… for now, let’s get to the fun stuff!
The Benefits
- Literally free money!
- You usually get 2-5% back on every purchase
- You can often get $100-$500 as a signup bonus
- Many offer coupons and discounts with select retailers
- Some let you purchase travel or gift cards at reduced rates
- Can provide travel benefits, such as:
- Elite hotel or airline status
- Free hotel stays or flights
- Airline lounge access
- Free TSA Precheck or Global Entry
- Rental car collision insurance
- Trip cancellation/interruption insurance
- Can provide extended warranties and purchase protection
- Can sometimes even include insurance for your phone
- Consumer protections against theft and fraud
- Improvements to your credit score
Most of the benefits I mentioned above will usually be mentioned on the credit card company’s website—you’ll want to read the details before choosing a credit card in order to see what benefits it offers. Sometimes, stuff like coupons, discounts, and gift cards will only be visible on the website after you sign up for the credit card and log in, so you won’t know for sure what offers will be available beforehand (and they often change every few weeks/months anyway).
Cash Back vs Points vs Miles
Different credit cards will tally up your rewards in different ways. For example, suppose you spend $100 on a 2% back rewards credit card during one statement. Some credit card providers will simply tell you that you have earned $2.00 of cash back, and will allow you to simply have it transferred to a bank account or applied toward your statement balance.
Others will tell you that you earned 200 “points“. Such points are often redeemable for cash at a rate of 1 point = 1 cent. Sometimes you can redeem these for cash (again, to your bank, or applied against your statement balance), but some cards will let you redeem the points for gift cards at a discounted rate (e.g. you could buy a $10 gift card for only 900 points, or about $9 worth of points). Others will allow you to purchase hotel stays, airline tickets, or other goods via the credit card company’s own special website, where your points get valued at 1.25x, 1.5x, or more (allowing you to, say, purchase a $300 flight with only $200 worth of points).
Still others will tell you have you have earned 200 “miles“. These types of credit cards are often those that are branded through airlines (or Amtrak), and miles often don’t correspond 1:1 with cents like points do. You can usually also earn miles just by flying! Then, when purchasing flights, you will be able to buy them with either miles or regular dollars (or sometimes both). Sometimes a $500 flight will cost 50,000 miles (a breakeven deal), or sometimes it will cost only 30,000 miles (a huge discount), so using miles can be a very good deal in some cases.
Personally, I prefer cards that can be redeemed for cash directly, because I don’t like to deal with booking via miles and don’t really travel enough to be loyal to any specific airline. But if you travel a lot and are willing to deal with the additional complexity, miles can be a great way to get discounts on travel.
Signup Bonuses
The way that these usually work is that if you spend a certain amount of money on your credit card within your first few months of owning it, the credit card company will give you a bonus (either cash back, points, or miles, depending on what they use). For example, they may give you a $200 bonus for spending $500 in 3 months, or 50,000 points for spending $3000 in 3 months. This can be extremely lucrative, as it amounts to basically a discount of 10-40% or more on everything you buy until you get the bonus (and you can usually accrue cash back on those purchases at the same time as well, making the total cash back even higher).
Coupons and Discounts
Many credit card issuers have a rotating selection of “offers” from various retailers, where if you “activate” the offer online and then purchase something from the retailer, you can get some additional points or cash back. For example, you might get 5% back at a specific store, or $10 off a yearly subscription to a streaming service.
Warranties, Insurance, and Purchase Protection
Some credit cards will offer various types of purchase protection for products you buy, including:
- Extended warranties, reimbursing you for the cost of the item if it breaks or doesn’t work as advertised.
- Damage and theft protection for new purchases
- Damage and theft protection for your smartphone (for as long as you pay your monthly phone bill with your card)
- Price protection, where they will refund you some money if the price of what you bought went down right after you bought it (charging you as if you had bought it at the lower price in the first place)
- Collision insurance on rental cars
- Trip cancellation/interruption insurance for flights and other travel arrangements
Fraud and Consumer Protections
If a merchant doesn’t hold up their end of the deal (e.g. if you purchase something online and it never arrives, or you buy some concert tickets that happen to be fake), and you aren’t able to resolve the issue on your own, you can contact your credit card company to issue a chargeback. They will reverse the transaction temporarily while they investigate, and if they agree with you, you get your keep your money. You can’t do that with cash or checks! Though debit cards allow you to do this too.
However, credit cards still beat out debit cards in cases of fraud, which is when your card information is stolen and used for transactions that you didn’t initiate at all. With credit cards, the most you can end up paying in the event of fraud is $50, whereas with debit cards, you need to report the fraud within 2 days to get the same protection. If it takes you between 2 days and 2 months to report it, you can end up paying $500, and if you don’t report it after 2 months, there are no protections at all. It’s worth noting that these are federal minimums, and some banks will provide protections even when they are not obligated to. But it’s not a good idea to count on it!
Credit cards also beat debit cards on another aspect of fraud. If someone steals your credit card, the most they can do is max it out (i.e. hit the balance limit on the card). You don’t lose any money immediately, and if you really need to buy stuff, you can fall back to a debit card or a different credit card. But if someone has your debit card, they can potentially drain your entire bank account, preventing you from performing other important activities, like paying rent. Yes, the bank will probably reimburse you eventually, but that could take days or even weeks, and in the mean time, how do you pay rent?
Oh, and credit cards don’t charge you any overdraft fees for maxing out the card either; they just decline your charge. Yet another benefit of credit cards!
Credit Score Improvements
As for your credit score, the gist is that the main way to improve your credit score is to take out small loans (which includes paying for stuff with a credit card) and then regularly make payments on time every month for a long period of time (regardless of whether you are paying the minimum payment, the statement balance, or anything in between). As long as you never miss a payment and don’t get close to maxing out your credit cards, your credit score will generally just keep going up over time! There are a couple of other factors, but these are the main ones. To learn more about what factors affect your credit score, check out this article.
Improving your credit score will not only allow you to qualify for even better credit cards, but can also make it easier to get loans for cars, houses, etc. (and at lower interest rates).
The Bad
So what’s the catch? Well, like I mentioned earlier, you run the risk of running up credit card debt if you’re not careful. If you’re the kind of person that will go on a shopping spree the moment you get your hands on a credit card, they may not be for you. As we mentioned earlier, if you can’t pay your entire statement balance at the end of the month, then interest accrues very quickly (often at a rate of 15-25% per year or more).
For example, suppose you went out and spent $2000 on a credit card and you couldn’t pay it back. If you only made the minimum payment of $50 each month, it would take you 7 years to pay off the card, and you would have paid a total of $4177. That’s over twice as much as you originally spent! And that’s assuming that you never spend anything else with that card, and that you make every single payment on time. If you miss a payment, the interest rate can go up, and you might have to pay an additional fee! As one might imagine, this can be very difficult to get out of.
But if you can learn to treat credit cards just like debit cards, then you can get a lot of benefit out of them. I personally recommend doing everything you can to imagine that you are spending the money immediately, just like a debit card or cash. And if you have enough money in your checking account for it, you can even set up autopay so that your statement balance gets deducted from your bank account every month (or you can even make payments more often than that).
However, even with that out of the way, there are still a couple of other downsides to dealing with credit cards, even if they are fairly minor in my opinion.
Annual Fees
Some credit cards charge an annual fee, which can be anywhere from $50 to $500 or more. Usually, such credit cards offer some serious rewards or perks, but if you’re not making full use of them, the fee may not be worth it. Luckily, there is also a very wide selection of fee-free rewards cards out there, many of which I would consider to be a better value than even $500-per-year cards.
You may not be able to get one
Depending on your credit score, your applications may be denied for many of the best credit cards out there. In fact, for folks with extremely low credit scores, their only option may be a secured credit card. To receive one, you must send the card issuer a security deposit (e.g. $100) to hold as collateral, just in case you don’t pay them back. In exchange, they will provide you with a very basic credit card—usually with no rewards and a very low limit (often equal to or only slightly higher than the security deposit). While this credit card isn’t very useful on a day-to-day basis, you can use it to build up a good credit score by making at least one small purchase every month and then paying it off reliably. Eventually, you can move on to a better credit card, and cancel the secured one to get back your security deposit (if you wish).
It can be harder to track your finances
If you only have a single bank account and a single debit card, it’s very easy to review all of your transactions and see at a glance how much money you have. But once you have a few credit cards, especially if they’re with different companies, it can start requiring some tedious clicking and math to get an idea of your finances. You’ll have to log into multiple sites, navigate multiple different types of interfaces, keep track of when each of your credit card payments are due, etc. It can be a real headache.
Some people use budgeting and financial tracking software, like Mint or You Need a Budget, to automatically aggregate data from various card providers/banks and store everything in a single dashboard, but there are security concerns with these (because you have to give them your bank passwords, in many cases).
Personally, I just manually review my credit card activity and payments every few weeks by logging into the website of each company. It is a bit annoying, but I don’t trust anything else to do it for me. I do, however, also set up alerts for each card so that I get an email for every single credit card transaction. This helps me keep tabs on my cards and see my transactions in a single place (my email inbox), while also allowing me to quickly tell if my credit card info has been stolen (since I’ll get an email for a transaction I don’t recognize).
It can be a pain to deal with the rewards
As much as it may seem like free money, you do actually some to expend some amount of effort to receive credit card rewards. Some types of rewards, like miles, can be complicated—I tend to shy away from these. Points can be complicated too, since you can use them in the credit card company’s shopping portals or redeem them for gift cards, but you can usually just redeem them for cash if you want to keep it simple. Regular cash back is in the same boat here: nice and simple. This is usually what I like to focus on. Every few months, I just click a button on the credit card website that redeems my rewards as a statement credit, making next month’s automatic payment a little lower. That’s the simple end of the spectrum.
Of course, if you have multiple cards, now you have to do that with all of them. And we didn’t even get into the part yet about how different cards earn rewards on different types of spending! Some cards will just give a consistent 1.5% or 2% cash back on every purchase, but other cards will have different rewards for different categories. One card may give you 3% back on grocery stores, 2% back at gas stations, and 1% back on everything else. Another may give you 5% back at Amazon and not even work at other stores. Another may give you 5% back on a category that changes every few months, and you have to specifically opt into it every time! Maybe it’s restaurants from January to March, but then gyms from April to June. Keeping track of some of these cards can be frustrating for many, and once you start accumulating them, it can be very difficult to keep them all straight in your head (and in your wallet).
Personally, I try to stick to only the highest-value cards, and I’ve gradually accumulated 1 or 2 credit cards every year for the past few years. Because I’m getting them all gradually, it’s a lot easier to keep track of in my head. And it also doesn’t hurt that I write a little note (on masking tape) on each card that says what rewards they provide!
Of course, again, you can make this as complicated or as simple as you like. If you really hate dealing with all of this, you can just get a single 2%-on-everything credit card and leave it at that. So don’t get too discouraged!
Conclusion
All in all, the main takeaway is this:
Credit cards can be a great way to save money on everyday purchases, IF you have the willpower to only spend what you can afford to.
And when it comes to the kinds of rewards and benefits available, there are a wide range of them that can satisfy any kind of lifestyle, whether you’re a world traveler or just someone who wants to save a little money on groceries, and whether you’re a super-optimizer or the kind of person who just wants to “set it and forget it”. In fact, here’s where I’ll make a quick recommendation based on the kind of person you are:
- Set it and forget it: Just get a 2% cash back rewards card and redeem the cash back every few months. Put it on autopay if you can and treat it like a debit card. That’s it! I recommend one of these:
- Super-optimizer: If you’re the kind of person who’s really into couponing, you probably fall into this category. You’ll probably want to check out these sites and get started on applying:
- In between: This is where I fall! I’m basically trying to optimize using the pareto principal, where I get 80% of the benefit of credit cards with 20% of the effort. Basically I just focus on getting a handful of generally-useful no-annual-fee cards, and I don’t worry about the edge cases too much. If this is something that interests you, then stay tuned for my next post, which will be all about my favorite cash back credit cards!
Next:
The Readyist 
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