As I was coming of age, I became aware of too many examples of people who had gotten into trouble with credit card debt. It made me avoid getting a credit card for several years. Eventually, though, I overcame my fear of plastic, and realized it is the user and not the card that should be in control.
A healthy concern about credit card use is not misplaced. After consumers reined in their spending in the immediate aftermath of the Great Recession, they have expanded their credit card debt in each of the last four years, and that debt is on the rise again in 2015. Still, having a credit card does not have to mean having credit card debt. Actually, if you make it a practice to pay off your balance every month, the benefits of having a credit card can outweigh the disadvantages.
This may be more true now than ever before. Here are six good reasons to overcome a fear of plastic, some of which were true 30 years ago when I got my first credit card and some which came into greater prominence in the 21st century:
- You win when you get free use of money. Because there is a lag between when you charge something and when you start paying interest on the amount you borrowed, you effectively get free use of the money for a short period of time. The catch is that once interest starts being charged, it is very expensive — credit card companies charge an average of 13.49 percent on outstanding balances. Still, if you pay your credit card bill in full and on time, you can avoid incurring interest charges. As long as you choose a credit card without monthly fees, then used correctly a credit card can be a convenience that doesn’t cost you anything.
- You win even more when you get free rewards. Not only can you have the convenience of a credit card for free if you pay your balances off promptly, but you can also get cash back or other rewards on your purchases. Credit card companies do this to induce you to use their cards, both for the interchange fees they get from merchants and on the assumption that many people won’t pay the money back right away and so will have to pay interest. It is especially important to avoid carrying a balance on rewards credit cards because they typically carry higher interest rates than non-rewards cards, but if you can pay your balances off on time earning rewards means the card company is paying you for using their credit card rather than the other way around.
- A responsible credit history can help you save on insurance. I was shocked when our auto insurance carrier wanted to raise our family rate a few months ago, even though we have pretty clean driving records. It turns out the deer that jumped into my son’s car a couple years back was not insured, so that accident is counting against us. When I complained, my agent suggested a program they have that offers lower rates for people with strong credit histories. I figured we would qualify, and we did, as a result of which our insurance premiums went down rather than up. Getting a credit card can be an important step toward establishing a credit history.
- You may need a credit history to rent an apartment. Never mind needing good credit to buy a home — you may need it just to rent. Landlords consider your credit history as an important indication that you will pay your rent and meet your other obligations as a tenant.
- Traveling without a credit card is very difficult. When I first started to travel for business, I actually used to get by with carrying a large amount of cash with me to cover the hotel bill. These days though, decent hotels tend to frown on letting you check in without a credit card, and forget about renting a car without one.
- Establishing a digital discipline is becoming essential. The reason some people shy away from credit cards is that they make it all too easy to overspend and get into debt trouble. This was my reasoning 30 years ago; but back then, not having a credit card was enough to avoid the temptation to spend impulsively. Nowadays, with financial affairs increasingly conducted digitally in a variety of ways, you simply have to develop the discipline not to abuse these tools. Otherwise, you will find more than one way to get into money trouble electronically.
If you want a simple decision rule for using a credit card responsibly, try this: Any month you cannot pay off your balance, put the card away and don’t use it until your current debt is paid off. This is a crude-but-effective way of making sure the accumulation of debt does not outweigh all the positive aspects of having a credit card.