Credit cards have become an integral part of modern financial transactions, offering a range of benefits and conveniences for users. These plastic wonders, with their magnetic stripes or embedded chips, represent more than just a convenient payment method.
From enhanced financial flexibility to robust security features, the advantages of credit cards cater to various needs and preferences. Let's delve deeper into the benefits of credit cards and explore the compelling reasons why they might be the perfect fit for you.
What Is A Credit Card?
A credit card is a payment card issued by a bank or financial institution, that allows you to borrow funds with which to pay for goods and services at merchants that accept cards for payment.
You are essentially using the bank's money to make purchases, with the agreement to pay back the borrowed amount, plus interest and any additional fees, according to the institution's terms.
Here are some key points to understand about credit cards:
- Borrowing: You have a pre-approved credit limit, which is the maximum amount you can borrow on the card.
- Purchasing: You can use the card to make purchases at any merchant that accepts the card network it belongs to (e.g., Visa, Mastercard).
- Repayment: You're responsible for paying back the borrowed amount, typically with a monthly minimum payment. If you don't pay the full balance by the due date, you'll start accruing interest on the remaining balance.
What Points Should One Consider When Selecting A Credit Card?
If you are considering taking credit cards as a first-timer, then there are some things you should consider. Here are some key points to consider when selecting the best credit card:
- Interest rates: Compare Annual Percentage Rates (APRs) and choose a card with a low APR, especially if you carry a balance. Look for introductory 0% APR periods for balance transfers or purchases if needed.
- Rewards programs: Consider cards offering rewards like cashback, points, or miles that align with your spending habits.
- Late payment fees: Avoid cards with exorbitant late fees. Aim for reasonable fines to encourage timely payments.
- Annual fees: Weigh the value of rewards and benefits against any annual fees to ensure they justify the cost.
- Other Fees: Consider annual fees, foreign transaction fees, and other potential charges associated with the card. Weigh the benefits against the fees to see if it's worth it.
Benefits of Credit Card
Responsible use of a credit card, such as making timely payments and keeping balances low, can positively impact your credit history, making it easier to qualify for loans, mortgages, and other financial products in the future.
Credit cards offer a range of benefits that extend beyond the convenience of making cashless transactions. Following are some of the benefits of using a credit card.
Reward points programs allow you to accrue points on every single purchase made with the card. It is the most useful money-saving tip to implement. Here are some forms of rewards:
- Cash back: You earn a percentage of your spending back as cash, deposited into your account. Cash back rates can vary greatly, ranging from a flat 1% to 5% or more.
- Reward miles or points: You earn points or miles for every dollar spent depending on the program and redemption method. These rewards offer redemption options.
- Discounts: It is offered by partnering with specific merchants or retailers. When you use your card to purchase at a participating merchant, you will receive discounts on your purchase.
2. Building Credit
Another advantage of credit cards is building credit based on your history of borrowing and repaying money. Lenders are more likely to approve your loan application and offer you favorable terms if you have good credit.
Don't max out your credit cards and try to keep your credit utilization ratio below 30% for a good card credit. Using a credit card to pay your bills on time helps build a strong credit history. This can lead to better interest rates on loans, mortgages, and even insurance in the future.
3. Purchase Protection
This credit card advantage provides financial security and peace of mind for your purchases. It is essentially a safety net that can help you recoup your money if something goes wrong with an item you buy with your credit card.
Most credit cards offer fraud protection, meaning you are not liable for unauthorized charges. Additionally, some cards offer extended warranties and purchase protection against damage or theft. Accidental damage to your eligible purchase within a specific timeframe (usually 90-120 days) can also be covered.
Carrying a credit card is much safer and more convenient than carrying cash. You can make purchases online and over the phone easily, and you don't have to worry about losing cash or having it stolen. It is about making our lives simpler, smoother, and less time-consuming.
Having readily available ATMs, self-service kiosks for bills and tickets, and 24/7 convenience stores ensures we can access essential services and goods at any time, regardless of the hour.
5. Travel Perks
Some travel-focused credit cards offer benefits like airport lounge access, travel insurance, and rental car insurance. These perks can make your travel experience more enjoyable and convenient.
This benefit for credit cards involves lower fares on flights, hotels, rental cars, cruises, and various travel activities. Achieve higher tiers in loyalty programs through frequent travel, unlocking additional perks like bonus points, lounge access upgrades, and personalized service.
6. Cash Flow Management
Credit cards offer flexibility in managing cash flow. They provide a grace period between the purchase date and the payment due date, allowing users to make necessary purchases without immediate out-of-pocket expenses.
Knowing when and how much money is coming in and going out ensures you can pay bills, salaries, and other obligations on time. You can also make informed decisions about borrowing and avoid falling into debt traps.
7. Zero Liability Protection
Most cards have zero liability protection feature that shields you from unauthorized charges made to your credit card account. If someone uses your credit card information without your authorization to make a purchase, then you can immediately notify your card issuer.
If the investigation confirms the transaction was unauthorized and you exercised reasonable care in protecting your card information, you won't be liable for the fraudulent charge. Card issuers have dedicated teams to handle fraud cases.
8. Budget Tracking
The credit card benefits include budget tracking. Credit card statements provide a detailed record of transactions, making it easier for users to track and categorize their spending. This can be helpful for budgeting and financial planning.
Based on past bills and receipts, estimate how much you typically spend in each category. Tracking your spending helps you identify areas where you might be overspending and potentially accumulating debt. After identifying the expense you can easily allocate specific amounts to each category.
9. Increased Purchasing Power
Life throws curveballs, and unexpected expenses like car repairs, medical bills, or urgent travel can strain your finances. A credit card with a decent credit limit can act as a safety net, providing immediate access to funds for such emergencies, offering peace of mind and preventing financial stress.
Credit cards allow you to make purchases even if you don't have the cash on hand right away. This can be helpful for emergency expenses or larger purchases. Increased purchasing power simply means your money can buy more goods and services than before.
10. Easy Currency Conversion
No more carrying around different currencies or hunting for currency exchange bureaus. Credit cards are a convenient way to make purchases in foreign currencies. They provide competitive exchange rates, and users can avoid the hassle of carrying cash or dealing with currency conversion services.
Forget scrambling for currency converters or calculating exchange rates in your head. Credit cards automatically handle the conversion from the foreign currency to your home currency at the time of the transaction. It is one of the best advantages of Discover Card.
11. Contactless Payments
Forget waiting in line at checkout while someone meticulously swipes their card or counts out exact change. Contactless payments utilize Near Field Communication (NFC) technology, which transmits payment information securely between your card or device and the reader over a short distance.
The convenience of these payments with your credit card is undeniable. Simply tap your card at checkout for a quick and secure transaction, especially useful in today's fast-paced world. Your payment is processed in a flash.
12. Extended Warranties
When you buy an eligible item with your credit card, the original manufacturer's warranty automatically applies. Once that warranty expires, the credit card's extended warranty kicks in, providing coverage for covered repairs or replacements, potentially saving you money on repairs.
Dealing with repairs can be stressful. With an extended warranty, the credit card company often handles the claims process, making it easier for you to get your item fixed. But, carefully understand the terms and conditions of the extended warranty, including coverage specifics, exclusions, and claims procedures.
Some Disadvantages Of Credit Cards To Look At
While credit cards offer convenience and potential benefits, it is crucial to be aware of the downsides before applying. Here are some disadvantages to consider:
- High-interest rates: If you don't pay your balance off in full each month, you'll accumulate interest, which can quickly add up and become very expensive.
- The temptation to overspend: Credit cards can make it easy to overspend, especially if you're not careful about tracking your spending.
- Annual fees: Some cards have annual fees, which can offset the benefits if you don't use the card enough.
- Impulse purchases: Easy access to credit can encourage impulsive spending, exceeding your budget and financial goals.
- Credit score impact: Missed payments and high balances negatively affect your credit score, making future loans and credit cards more expensive.