David E. Slotnick of Business Insider, a fast-growing business website, noted that you should avoid getting drowned in credit card debt, albeit with rare exceptions. However, that does not mean you should avoid them altogether. Credit cards are beneficial as they can help build your credit profile and to earn rewards.
You should treat your credit card as if it were your debit card, meaning you should not spend more money than you have. This also includes not carrying a balance on a monthly basis by paying the minimum amount of your balance, causing it to incur interest rates the following month. Hence, it is recommended to pay your balance in full every month. This way, you can avoid getting into debt, overspending, and paying for interest rates
Consumers’ Perception Of Credit Cards
Experian, a multi-national consumer credit reporting company in Ireland, found that 62% of over 1,000 respondents aged 18 and above had one to five credit cards, and three was the average number of credit cards. With an average monthly charge of $779.83, the respondents’ average credit card debt was $2,326.71. The participants owned different types of cards such as retail/store-specific card (41%), other type of rewards credit card (39%), secured credit card (32%), balance transfer cards (18%), airline-specific credit card (16%), business/corporate credit card (13%), and student-credit card (3%).
According to the respondents, the benefits of using their credit cards were to have a cushion for emergencies (42%), to avoid carrying cash (38%), to get rewards (36%), to build their creditworthiness (34%), to record all of their transactions (19%), to protect against fraud (15%), to help manage their budget (12%), and hasten their transactions (10%). Meanwhile, the disadvantages of using credit cards were high interest rates (51%), deepening their debt (36%), annual fees (33%), risk of identity theft (33%), high-cost fees (31%), and monitoring account for fraud/inaccurate charges (13%).
However, the respondents’ perceptions of the benefits of credit cards did not always match how they were using them. Although they cited “having a cushion for emergencies” as a top benefit, they were actually using their credit cards to purchase things they need (68%), to get reward points (42%), to improve or build their credit worthiness (32%), and to build up my credit limit (31%). In reality, only 37% used their credit cards to provide a cushion for emergencies.
For respondents who planned to apply for new cards, they felt the need to face multiple challenges such as finding the number of available credit card options overwhelming (61%), saying they can’t tell which card is the best fit for them (57%), having been denied for a credit card (40%), and disliking the uncertainty (69%).
When asked what they were looking for in a credit card, the respondents answered no annual fee (54%), rewards (45%), low interest rate (40%), and low APR (28%). For those who said they would likely apply for a new credit card in the next six months, 23% said they wanted a new one to build their credit and 15% just wanted to have another card. 14% were looking for better rewards while 10% were looking for a lower interest rate. When looking for a new card, respondents would use search engines (37%), or look at online reviews (21%). 17% would talk to their banks and family members while 11% would consult their friends. They also looked into online forums and direct mail to hunt for a new card (11%).
Credit Cards Vs. Debit Cards
1. Fraud Protection
Credit cards have more robust fraud protection and to some extent, separated from your checking account, adding another layer of security. On the other hand, debit cards are connected to your checking account. When purchasing an item — regardless if it is processed as credit or as debit — the funds are transferred from your account to the seller.
If a thief has access to your physical card or your information from it and spends money, you would lose funds from your checking account. Further, this would also mean you won’t be able to access funds that are allocated to your basic expenses like utilities and tuition. “If you have additional accounts linked to your debit account, such as a savings account for overdraft protection, these accounts would also be vulnerable," warned Dan Wilke, CEO and content creator for Credit Liftoff, as quoted by Casey Bond of American media company US News.
Alternatively, the funds in your account will not be spent until you pay your statement, which is another benefit of using a credit card. You can flag unwanted charges if a thief steals your number and commits fraud. Your card will be frozen and an investigation of the fraud will be launched. You don’t have to worry about losing the funds to pay for your rent and utilities.
2. Build Credit
Your credit profile contains all the information about the loans you have applied for, held, and paid, which constitutes your credit score. Credit score is defined as a numerical representation of said profile. Your credit score also showcases your ability to use credit responsibly, including on-time payments and not being in debt.
Wilke noted, “A debit card provides none of the credit history and credit score benefits provided by responsible credit card use." Further, if you have good credit history, you will be more likely to be approved at a low interest rate When you want to apply for a loan such as a car or a mortgage.
3. Manage Fluctuations In Income
Credit cards can handle your expenses without worrying about your next paycheck. For example, vendors like gas stations, hotels, and rental car companies often put a hold on your account when purchasing their goods or services. While these may last for a couple of days, “This has little impact on a credit card," said Jim Miller, vice president of banking and credit card practice at J.D. Power. If you use a debit card, the funds are “no longer available until the hold has cleared.”
4. Enjoy Other Benefits
You can take advantage of other perks such as travel protection insurance, rental care insurance, and price protection. Wilke stated while these benefits vary from card to card, they can be useful in certain situations.
You can still apply for a debit card despite its drawbacks. When you have a credit card, you have to be careful not to rack up too much debt. Owning a credit card entails responsible spending, but if you are uncomfortable with incurring debts, then a debit card may be a better option. Either way, it is better to weigh the pros and cons of using a credit or debit card.