A persistent myth among people new to credit cards is that you don't need a card unless you’re planning to carry a balance on it. After all, if you can afford to buy something outright, why not just pay cash?
A related belief is that if you do have a credit card, you should carry a balance on it, because otherwise what's the point of having the card at all? That shiny piece of plastic seems like a good way to buy something you can't afford right now or to make ends meet until your next paycheck — and many new cardholders don't feel an urgency to pay off their expenses quickly. But that’s just an easy way to get into massive debt.
Responsible cardholders strive to pay their balance in full every month so they won't carry debt into the next month. In most cases, they could pay cash for their purchases, but they choose not to. Here's why.
Why use credit instead of cash or debit?
Regardless of whether you carry a balance, using a credit card for purchases offers benefits you don't get with cash or debit.
Using a credit card responsibly is the fastest way to build good credit. Even if you use it for a single recurring bill, such as your cell phone, and pay it off each month, those on-time payments are showing lenders that you are reliable. Practice good habits, and over time your credit score will go up, opening the door for better interest rates on a mortgage, auto financing or other loans.
Credit cards provide a buffer between purchases and the money in your bank account. If someone steals your credit card information and uses it to make fraudulent charges, the money won't be pulled directly out of your account, as it would with a debit card. You can dispute the charges with your credit card issuer, and in most cases you'll have zero liability. It's the issuer's money at stake, not yours. In addition, credit cards often come with an array of benefits, such as purchase protection or an extended warranty. And many cards, especially travel cards, provide insurance for rental cars, lost luggage and other things.
If you’re using just cash or debit to buy things, you’re missing out on credit card rewards in the form of cash back, points, frequent flyer miles or other currency. Getting 1% to 2% back as rewards might not seem like much if you look at an individual purchase, but it adds up over a year. For every $10,000 in expenses you put on a credit card, that's $100 to $200 in rewards. And that's not even mentioning the sign-up bonuses that many cards give you if you spend a certain amount in the first few months.
Today, most businesses, even pop-up shops, roadside stands and farmers markets, accept credit cards. Swiping your card is a lot easier than having to hit the ATM before going out, and you don’t have to worry about the safety risks of carrying a lot of cash.
Why pay in full every month?
Paying your balance in full and on time is just about the smartest thing you can do with your cards. In addition to keeping you out of debt, paying in full saves you money and can boost your credit.
NO INTEREST CHARGES
Credit cards charge you interest only if you carry a balance from one month to the next. So this one's a no-brainer: Pay in full, and you won't have to deal with the double-digit interest rates that most cards charge.
LOWER CREDIT UTILIZATION
Credit utilization refers to the portion of your available credit that you're currently using, and it's a significant factor in your credit score. A rule of thumb is to keep utilization below 30%, meaning that if you have a $10,000 credit limit, your balance shouldn't exceed $3,000. Keeping your credit utilization low is a signal to lenders that you can manage your spending.
Keeping your credit utilization low and making on-time payments are both positive for your credit score. Keep up those good habits through a long credit history with a diverse mix of accounts, and you will have excellent credit.
Not only can people enjoy the benefits of a credit card without going into debt, that’s what users should do. Used wisely, a credit card is an excellent vehicle for building credit, gaining extra protections and earning rewards for the spending you're already doing.