Are Credit Cards Evil?
Credit Cards catch a lot of flack in the personal finance blog world and deservedly so. Many people have fought or are fighting mountains of credit card debt and feel that credit cards are unsafe.
Brack over at Goliath Debt, David Income is one of those people fighting back from debt. He is working on paying off "$68,000 in credit card debt, student loans, and a car loans". He recently asked if he should Cancel the Card? Or Be Prudent?.
Despite the risks of credit card use I still think they are a great too. I can't imagine having to carry cash or a checkbook everywhere so I am going to assume that the decision is between Credit Cards and Debit Cards. I think that keeping a Credit Card and being prudent with it is the best choice.
Eight Reasons To Use a Credit Card
The most you can be liable for a stolen credit card is $50 (if you report it correctly). With a debit card the limit is your bank account balance (plus overdraft!). See http://www.ftc.gov/bcp/conline/pubs/credit/atmcard.shtm
Built in Overdraft Protection
You have $50 left in your bank account and you're getting paid tomorrow. You buy $100 at the grocery store. With a credit card, there's no problem. With a debit card you will very likely have an overdraft charge.
This is assuming that you don't blow your credit limit of course. That kind of use wouldn't be prudent though.
As you use your CC wisely, you will improve your overall self control. This will benefit you in your financial life and in other areas of your life.
It's seems silly to me to keep hundreds or thousands of dollars in your checking account when it could be earning money in a high-yield savings account or a money market account.
I put my paycheck into an ING savings account earning 3% APY. I pay off the credit card a few days before it's due. That gives me 25 or so days a month to have $1000 or more extra dollars in my savings account making me money. If that money was in my checking account, I'd make zilch.
As I posted a few days ago, I am currently getting 1% cash back with my credit card. I'm not aware of any debit card that offers rewards, but if you are, please tell me!
If you have large loans in your immediate future, you probably want everything in your favor for a lower rate. If keeping even an unused no-annual fee credit card open will keep my credit score higher and make it easier to get a lower interest rate on my mortgage, you can bet I'm going to do it.
Some Credit Cards offer benefits like car rental insurance. This can save you money if you use these services anyways.
If you do have an emergency, you will have the Credit Card to fall back on. No, it's not idea and yes you should use your emergency fund first, but debt is better than homelessness, missing meds, or other urgent situations.
Prudence is a Virtue
Essentially what you need to do is treat your Credit Card like a Debit Card. You can even write DEBIT on it with a sharpie if it will help you be responsible.
I come from a town where hunting is quite popular, but there's still a lot of controversy over guns. It seems that feelings among personal finance bloggers are similar, and I take the same position I do on guns:
They are useful tools if you use them right. If you use them incorrectly they are incredibly dangerous. If you or someone in your home can't use them safely, get them out. If everyone who will be using them can be safe with them, then by all means keep them around.