Many financial experts caution consumers against using credit cards. â€œLive debt free!â€ they say, pointing out how interest charges and fees add up over time and limit financial freedom.
While there is certainly wisdom in the idea of staying out of debt and only purchasing what you can afford to buy with cash, there are times when it actually does make the most financial sense to use a credit card. In certain situations, pulling out the plastic can save you money, help you earn rewards, and give you benefits that paying in cash canâ€™t.
1. You Want to Make a Big Purchase Without Interest
When you are making certain large purchases, such as computers, appliances, home improvements, or vacations, it can sometimes make more sense to use a credit card than to pay cash or take out a loan â€” especially when your credit card will not charge any interest for a certain period. For example, paying for a home improvement project with your zero-interest credit card and paying it off in installments can be much less expensive (and have fewer hassles) than taking out a home equity or home improvement loan. Even without an interest-free period, if you can pay off the card right away, it makes more sense to use plastic, since your credit report wonâ€™t take a hit from opening a new account for a loan.
The key to such a plan working, of course, is paying the balance on your credit card, either right away or before the zero-interest period expires. Otherwise, you will most likely end up paying more in interest on the card than you would on a loan, and affect your credit score due to higher utilization.
2. You Will Earn Big Rewards
Rewards, in the form of redeemable points or cash back, are a major motivator when using credit cards. And if you can earn a significant reward â€” such as a free flight â€” it might be worth using plastic. For instance, many rewards cards offer a major point bonus upon opening the card or reaching a certain spending level. Again, if you pay the balance right away, these rewards can equal big savings.
Even if you donâ€™t qualify for a signup bonus, the rewards you earn on purchases can still make using the card a smart move. When buying a big-ticket item like a computer or appliance â€” or completing that home improvement project â€” the points or cash back you earn can amount to a discount. In other words, if you earn 1 percent cash back on all purchases, and use your zero-interest credit card to pay for a $5,000 kitchen remodel, youâ€™ll earn $50 in rewards, plus have the chance to pay for your project over time with â€œsame as cashâ€ terms. Thereâ€™s no reason that you shouldnâ€™t take advantage of such an offer when you can get it.
3. Youâ€™ll Gain Other Benefits
Cash back or rewards points arenâ€™t the only benefits of using credit cards. Many offer additional benefits that can save you money. Many travel rewards cards, for example, offer travel insurance on trips booked using the card, a benefit that can save you hundreds of dollars both in insurance premiums, and in expenses should something go wrong with your trip. Most credit cards also offer other benefits to travelers as well, such as rental car insurance, which saves you some cash.
Another benefit that can save you money is the additional protection that using a credit card can offer. Many cards offer extended warranties for up to one year past the standard manufacturerâ€™s warranty, as well as protection against defective or damaged merchandise. Should you have a dispute about a purchase, your credit card company can help you get reimbursement or replacement at no cost, something that can provide peace of mind when youâ€™re making large purchases.
Again, the key to using credit cards to your advantage is treating them like a loan, and not carrying a balance that will accrue interest, as interest charges will negate most savings and benefits. If you can pay the balance in full when the bill arrives, though, using your credit cards might prove to be a savvier financial move than paying cash or taking out a loan.