Use Credit Cards for Everything

Note: This post assumes that you use credit cards responsibly.

In the previous post, we outlined why credit cards don’t have to be the one-way tickets to the mountains of high interest debt that some people describe. Now, let’s take that a step further: people should use credit cards for every purchase they make.

Discounts on Everything#

Everything you buy with most credit cards is effectively slightly discounted in price. How? Most credit cards offer cash back or points for every purchase made. So when you make purchases using these cards, you spend the same amount of money that would have been spent if using cash, but a small amount of cash back or points is returned to you.

For example, if you have a credit card that earns 2% cash back, every purchase you make comes at a 2% discount. If you were to buy something for $10, you could either pay $10 in cash, or you could use your 2% cash back credit card. With the card, you’d pay the same $10 to the merchant, but you’d earn $10 x 2% = $0.20 in cash back, so the net cost would be $10 - $0.20 = $9.80.

Maybe twenty cents isn’t going to change your life. But over the course of a year, $25,000 of expenses all purchased using the card would earn $500 in rewards, and I’m not sure I know of anybody that would turn down an easy $500 of tax-free money every year.

Convenience#

Using credit cards is far more convenient than using cash. You never have to add up different bills or handle change. You don’t have to run to the ATM to replenish the cash in your wallet. Every purchase made with your credit card is just an electronic transaction; no mental math or transfer of physical money involved.

Ok so it’s the same as my debit card, so I’ll just stick with that.

Bad move. Let’s cover why.

Security ¹#

In order to understand why credit cards are the most secure option between cash, debit cards, and credit cards, we’ll first need to go over how money is exchanged for each type of transaction.

Cash

When cash is used to make a purchase, the buyer trades physical dollar bills in return for the item they’re purchasing. They may receive some smaller amount of physical money back if they paid more than the price of their purchased items.

Debit Cards

When a debit card is used to make a purchase, the card is swiped at the register. The money from the cardholder’s linked bank account is then withdrawn and transferred to the merchant’s account.

Credit Cards

When a credit card is used to make a purchase, the card is swiped at the register. The bank that issued the card transfers some of their money to the merchant’s account and keeps track of that transaction. The cardholder will have to pay that money back to the bank some time soon.

So Why Are Credit Cards More Secure?

The key takeaway is that, of the three options, credit cards are the only choice where you’re not exchanging your money. You’re exchanging the bank’s money.

Yes, eventually you have to pay the bank back, so in the long run, it’s practically the same as a debit card or cash. But what about if your card gets stolen?

Fraudulent activity can occur on anybody’s credit or debit card, even without you losing your physical card! So what happens for each of our payment options when you lose them, or if somebody gets ahold of your card number?

You’ve Lost Your Cash

It’s gone.

You’ve Lost Your Debit Card, or Somebody Else Knows The Card Number

Somebody can use the card or the card number to make purchases. When they do, the money to cover their transactions is transferred out of your bank account to the merchant. You no longer have that money in your bank account.

There are laws that protect debit card users in these scenarios, but they’re not perfect. The gist is, if you report your card stolen before it’s used (which is not always possible), you won’t owe anything if the thief starts using your card. If they use it and you report it within two days, you’ll only owe up to $50. If you report it between two and sixty days, you’ll owe a maximum of $500. Anything past sixty days, your liability is unlimited.

Regardless of how much you owe, the money is taken from your account when the purchases are made. So if the thief buys a new phone with your debit card, you’re now missing $1000 regardless of how quickly you report it to the bank. Yes, they should eventually refund you, but can you pay for your normal expenses without that $1000 until they do?

You’ve Lost Your Credit Card, or Somebody Else Knows The Card Number

Somebody can use the card or the card number to make purchases. When they do, the money to cover their transactions is transferred to the merchant from the bank that issued the card. You now owe money to that bank, but you still have all of your money.

There are laws that protect credit card users in these scenarios. The protections provided by credit cards are far superior to those of debit cards.

To summarize, you won’t owe anything past $50 on the fraudulent transactions, and most banks won’t even charge you that. I’ve had unauthorized transactions appear on my credit cards a few times over the years, and in total I’ve paid $0 as a result of them. Once you tell the bank that they’re fraudulent, they’ll void the charges, cancel your card, and send you a new one in the mail.

The most important thing to note here is that when your credit card is compromised, you don’t lose any money. There’s never a point where you’re waiting for a refund from the bank or retracing your steps to find the $20 you dropped. It’s just a mild inconvenience.

Cardholder Benefits#

Credit cards frequently offer more than just convenience, security, and cash back; they can also offer cardholder benefits. These benefits can include things like travel or rental car insurance, purchase protection or extended warranties, or free checked bags on certain airlines. These vary wildly between cards, but it’s good to know they’re available in case you need them.

Establish Your Credit Report#

Yet another reason that people should use credit cards is to establish their credit report. Your credit report is essentially a history of all of your debt repayments that lenders can use to determine whether they’ll approve you for loans. Some employers and landlords also use a candidate’s credit history to supplement the information in the application.

Credit reports are subject to a similar paradox as first jobs: you need good credit to secure loans or credit cards, but you need loans and credit cards to build credit.

Some credit cards are easier to be approved for than others, although you’ll likely be given a very small limit on your first card. Getting that first card is key. If you use it responsibly and consistently, it’ll help establish a reliable credit report that will help you when applying for future cards, loans, jobs, and potentially even places to live.

Conclusion#

When used responsibly, credit cards are powerful tools that come with many benefits. From building your credit report to protecting your bank account from fraudulent activity, they’re the obvious choice for making purchases. And the fact that they can earn you a free vacation² is just an added bonus.