Sunday, 10 February 2008

20 valid reasons why you can and should use credit cards

Credit cards are viewed by many people as something evil, which lures people into bankruptcy, causes them to make impulsive and excessive purchases, and is at odds with sound principles of frugal and financially responsible living. Well, knives serve different purposes as well - one can argue that they can be used to cause property and body damage, as well as to rob and kill people. At the same time, however, knives basically have been one of the few most useful and universal tools that faithfully accompanied human beings in their evolutionary journey through ages. The similar argument can be applied to credit cards (although their history is much shorter :-)).

In this post, I attempted to sum up the reasons of why and how credit cards can benefit you and other people around you. So, credit cards:
  1. Can be used for online and phone-based reservations and purchases, exclusively so for some services like car rentals and hotel reservations. Credit cards are sometimes the only source to make online purchases and are generally a more convenient alternative to webmoney.

  2. Can be used to pay for parking tickets, fines, and bills over the phone and online, resulting in savings in terms of mailing costs and time.

  3. Can be set up for automatic bill payments which are quickly processed, protect you from missed payments and late payment penalties, and sometime help you get automatic-payment discounts from certain service providers (like a wireless-services company).

  4. Can be used to get nice discounts on some time-limited promotional purchases (say, you can save 20% on bookstore online purchases) or through permanent cash-back or bonus-point incentives. Many cards are paying you back 0.5-2% in a form of discount or bonus points that either reduce your statement balance or can be redeemed later with specific retailers (like PC Points with a PC MasterCard).

  5. Can collect air miles, so that you can use your air-miles balance towards the cost of future air travel trips.

  6. Can be used to make deposits for large purchases, such as furniture or other household durables. Your credit-card deposit is not processed until a delivery takes places and the total transaction is closed, so there is no opportunity cost involved.

  7. Allow you to cancel a payment or deposit if you decide not to go ahead with your purchase. Sometimes it is difficult to get back your money for a cancelled product or services. Canceling a credit card transaction, as long as you have a confirmation of a cancelled contract or purchase, is relatively easy and ensures that a dishonest seller does not retain your money.

  8. Can be used to borrow money for emergency needs through a balance transfer or cash withdrawal.

  9. Can be used, at low promotional balance-transfer rates (which can be even zero), to pay off your higher interest debt or borrow money for short term purposes at a lower interest cost.

  10. Are a great source of a FREE short-term credit. Aside from a standard 20-24-day grace period, you also get extra 26-30 days of free credit when you time your large-sum purchases. For example, if you know that your regular balance payment dates are normally on the 25th day of a month and your balance closing dates are therefore normally around the 2nd day of a month, then you can make your purchase immediately after your monthly statement closes, so that the relevant balance is paid on the 25th day of the NEXT month. The resulting interest savings and/or opportunity cost savings can be substantial if you, say, are paying for an expensive durable item.

  11. Help avoiding certain costs associated with the use of other payment media (costs of ordering and mailing cheques, cash withdrawal fees for the unaffiliated-bank ATM use, fees for certified cheques, etc.).

  12. Help avoiding foreign-exchange transactions to make purchases in a foreign country. Most credit cards can be used in any country as long as relevant credit-card formats are accepted there.

  13. Can be used for their valuable and convenient complementary features, like travel, car rental, and AD&D insurance coverage.

  14. Use much less space in your wallet and are way more durable and harder to destruct in comparison with cash and cheques.

  15. Are safer for carrying than cash and are easily replaceable when lost or stolen.

  16. Limit your liability in the case of unauthorized use to your credit limit or even zero.

  17. Create your credit history, which is essential for certain financial transactions, such as getting a bank loan or a residential mortgage.

  18. Help keeping track of all your purchases. Paper receipts and bills tend to get lost, but credit card statements can be easily stored and retrieved.

  19. Help getting better control over your personal finances because you can download online credit card statements in the Quicken or MS Money format for later use in your personal finance planning and budgeting software.

  20. Teach you in action about the power of compounding, although in a somewhat negative sense. If you do not pay for your purchases on a timely basis, then you will see how your balances will grow exponentially. Exactly the same principle works when your deposits earn interest, so you can get an idea how you can grow your money.

In the next related post, I will summarize a few tips on optimizing and simplifying your credit card use experience.

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