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Credit Cards: A Love/Hate Relationship

Planning Insights

I hate credit cards – as most people use them

There is an estimated $931 billion in outstanding credit card debt.  That’s $931,000,000,000!  Many households carry no credit card debt, but those who do have an average balance of nearly $16,000.  When asked why these consumers owe money on their credit cards, the most common answer is because of “Spending more than I can afford on unnecessary purchases.”  I am glad they answered honestly, but this is a problem. 

When I’m working with clients with credit card debt, getting this paid off is usually the highest priority.  Since the average interest rate on credit cards is 16.9%, permanently paying these down (guaranteeing a 16.9% return on investment) is the best financial move they can make. 

I love credit cards – when used wisely.

My wife and I use credit cards for virtually everything we purchase.  Gas, meals, Costco runs, plane tickets, online purchases are all purchased using our credit cards.  Then… we pay our credit card balance off at the end of each month.  A large majority of my clients do the same thing.

Couldn’t we just pay cash or use our debit card for these purchases?  Sure, and this would make sure we are not making those unnecessary purchases with money we don’t have.  Fortunately, we are both disciplined in our spending so this has not been as issue.

What are the benefits of using credit cards this way?  The most obvious ones are:

  • Points!  Using a credit card that offers cash-back bonuses or airline miles is a nice benefit.  We’ve been using cards that offer cash back and we use the accumulated cash to pay for a nice family outing once a year.  What’s better than a memorable meal with your family?  A “free” one.
  • Tracking Spending. Tracking where cash goes requires too much work.  Paying for things “electronically” (credit or debit card) provides an excellent way to see where your money is going.  It’s always a surprise to see how the different spending categories stack up.
  • Primary Rental Car Insurance.  When you use your credit card to rent a car, you can likely decline all of the insurance coverage the company is going to try to sell you.  (Verify this with your credit card company.)  This automatic coverage could allow you to avoid making a claim with your personal insurance if something happens to your rental car.
  • Cheaper Foreign Transactions.  Some credit cards offer excellent currency conversion rates and no foreign transaction fees when travelling outside of the US.  This can save you hundreds of dollars when travelling.

The benefits of using credit cards does not end there.  If you use your card to make purchases, there are many additional benefits that your credit card company might offer:

  • Extended Warranty Protection.  Doesn’t everything break the week after the warranty has expired?  Many cards extend the manufacturer’s warranty period by a year or more.
  • Purchase Protection.  If your property is lost, damaged or broken shortly after your purchases, you credit card company might pay to have the item fixed or replaced.
  • Price Protection.  Have you just made a purchase only to see a lower price offered a month later?  Several credit cards will send you the difference.
  • Trip Cancellation / Trip Interruption Insurance.  If your trip is shortened by severe weather or an illness, you might be able to be reimbursed for your pre-paid travel expenses.
  • Baggage Delay Insurance. Do you need clothes or toiletries while you are waiting for the airlines to find your baggage?  Many cards will reimburse up to $100 per day for these items if you find yourself in this situation.
  • Trip Delay Insurance.  If you find that your airline has left you stuck overnight without taking responsibility, your credit card company might reimburse your costs of meals and lodging (up to $500 per ticket) while you are waiting.
  • Travel Accident Insurance.  Some credit cards will provide life and accident insurance while riding as a passenger on a “common carrier” (motorized air, land, water passenger transportation).  I’ve seen coverage as high as $500,000.

Of course, these benefits only apply if you use your card to make the item/trip/rental purchase.  Each credit card company has its own set of benefits and finding which perks your credit card provides is not easy.  Don’t forget that there is plenty of fine print – your accident in that Aston Martin is probably not covered.

For now, keep these potential benefits in the back of your mind.  If you find yourself stranded at the airport or having broken a recent purchase, check in with your card’s benefits department to find out if you might be able to make lemonade out of lemons.