Credit cards are often pegged as high-interest debt traps, but if used wisely, they can actually help you save money and streamline your finances.
I use credit cards regularly as part of my monthly cash flow. As a freelancer, my variable income means that I don’t always get paid the same time each month. There are times a client who regularly pays within five days of receiving my invoice suddenly takes 15 days to pay an invoice. This can cause stress since the rent is deducted the same time each month, bills need to be paid and groceries need to be bought.
Advantages of Using Credit Cards
There are a number of ways to use credit cards to better manage your regular finances. Your use of plastic also comes with protections and benefits.
“In the wake of recent retail security breaches, consumers need to be careful when swiping their debit and credit cards,” says consumer expert Andrea Woroch. “Credit cards offer several layers of protection against fraudulent activity.”
Woroch points out that, even though debit cards have liability protections, they are still connected to your bank account. “Thieves can get direct access to your cash funds,” she says. It can take time to have that money returned to you, and it’s unsettling to know that someone else can access your bank account. With credit cards, the money accessed isn’t yours. Also, your liability for unauthorized use on your credit card is limited to $50 under the Fair Credit Billing Act , while your liability with your debit card, per the Electronic Fund Transfer Act, depends on how quickly you report unauthorized use.
On top of that, many cards offer extended warranties and return protection. This allows you to work with your card issuer to return big-ticket items and other purchases that the merchant may not be willing to accept.
One writer for MyMoneyDesign.com, with the handle MMD, also points out that it’s easy to track purchases and set up alerts to keep you on top of your spending. “When spending starts to reach a certain limit, automated services can let you know you are almost maxed out for the month,” he writes.
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How to Make the Most of Credit Cards
I use my cards to pay most of my bills. I automate payments for gym memberships, satellite TV and even my charitable giving. I don’t have to worry about this money coming out of my checking account and putting my student loan payments and monthly rent payment at risk. On top of that, I also receive rewards because I use my credit cards for these expenses, as well as common expenses such as gas, groceries and entertainment. MMD claims that he logged more than $1,000 in cash back last year by using credit cards, and I believe him. When I add up my cash back bonuses, plus the free travel and discounts I receive, the value of my card use is also pretty close to $1,000.
Woroch warns that you need to be careful when using your cards to generate points or cash back. “You shouldn’t go on a shopping spree to rack up extra points or cash back,” she says. “Always pay the balance off in full each month to avoid interest fees.”
Using your cards for most of your discretionary costs is a good way to ensure you have money in your checking account for mortgage payments and insurance premiums — no matter what financial setback comes up. Plus, using your card in this manner means that you pay fewer bills each month. With nearly everything on one card, you have only to pay off the balance at the end of the month, making your budget management simpler.
For those with businesses, business credit cards can streamline your company’s budget and help you keep better records. “I have a credit card that I only use for my vacation rental property and one I use solely for business purposes,” says Woroch. “I can categorize spending and expenses based on those separate accounts instead of fishing through one card to pull information.” This makes things easier at tax time when it’s time to tote up all your expenses.
As long as you keep your credit card spending within the confines of your budget, these handy pieces of plastic can serve as convenient financial tools. “The key is disciplined spending,” writes MMD. “As long as you’re smart about how you use your card, it can work to your advantage.”
Miranda Marquit writes about building credit for Credit Card Guide, a site that educates consumers on improving financial habits.