Once, cash was king. People paid for their everyday purchases with cash and saved other methods of payment for big, infrequent purchases. But now credit cards are accepted almost everywhere, and some people never carry cash at all.
The Nerds recommend paying for almost everything with a credit card. Credit cards are safer to carry than cash, they make it easier to track your spending, you can earn significant rewards without changing your spending habits, and paying with credit helps you build credit. Pay your balance in full every month, and you’ll never pay a penny in interest, either.
Here are a few of the top benefits of plastic.
If you lose your wallet or get robbed, the cash you were carrying is almost certainly irretrievable. If thieves go on a spending spree with your credit cards, however, you generally won’t be held responsible for fraudulent purchases. It may take some time to sort out the resulting mess, but you won’t actually lose any of your money.
Debit cards, too, pose a risk. When your credit card is used fraudulently, it’s the card issuer that loses money. When your debit card is used fraudulently, the money comes out of your bank account. Assuming you report the fraud promptly, you should get your money back — eventually. It could be a while until things are sorted out. During that time, checks may bounce, automated payments may be refused due to insufficient funds, and you may have a hard time covering your bills.
Keeping tabs on your budget is challenging no matter how you spend your money. But figuring out where cash went is especially difficult. Misplace a receipt, and there’s often no other record of how much you spent. With credit cards, everything appears on your monthly statement. If you use a budgeting app like Mint or You Need a Budget, you can import data from your credit card and bank accounts. This makes it easy to fit each purchase into a budget category and see where you’re overspending and where you can stand to splurge a little.
Credit card rewards are designed to encourage you to use your credit card, and they’re very persuasive indeed. With a simple flat-rate card that pays the same amount on every purchase, you can get back 1%, 1.5% or even 2% of every dollar you spend, either as cash or as points or miles to redeem for travel or other things. Other cards pay even higher rewards in specific spending categories — 6% on groceries, for example, or 5% on common spending categories like gas and restaurants.
A word of caution, however: Don’t spend more than you normally would just to get additional rewards. A little cash back won’t make up for that extra $100 at the grocery store or that extra $250 worth of clothes. And if you carry a balance from month to month, the interest you pay could more than wipe out the value of your rewards, so pay in full whenever possible.
You don’t need to have a credit card to have good credit, and you certainly don’t have to carry a balance. But careful use of a credit card is the single best way to improve your credit scores, and good credit opens many doors. It makes it easier to secure housing, whether a potential landlord is checking your credit before giving you the keys or you’re applying for a mortgage to buy a home. Cell phone providers, insurance agents and utility companies also might use your credit history to determine your eligibility and even your rates.
If you do have a credit card, making regular small purchases, keeping your balances low and paying your bills on time will improve your credit score over time.
When not to use a credit card
When you’ll have to pay an extra fee: Merchants pay processing fees every time you use a credit card. Most of the time, those fees are just considered a cost of doing business. But sometimes the merchant might pass the cost of the transaction on to you by tacking on an upfront surcharge or “convenience fee” for using your credit card. In those cases, you’ll probably want to pay some other way, unless your credit card rewards are high enough that they’d cancel out the surcharge.
When you don’t want the merchant to pay a fee: Similarly, you may want to avoid using credit cards with smaller merchants you especially want to support. They may appreciate it if you pay in cash or by check, because then they don’t have to pay the processing fees. Even debit cards are better than credit cards from merchants’ standpoint, because processing fees for debit cards tend to be lower than what they’d pay for a credit card transaction.
When you don’t want to overspend: Some people have a hard time keeping their spending under control when they use a credit card. That five-figure credit card limit might make it hard to remember why you shouldn’t buy that shiny object. If you’re close to your credit limit or you’re worried about racking up a high credit card balance, you may want to reach for your debit card or use cash.
There are a lot of great benefits for credit card users. Just make sure you’re able to spend wisely, whatever method of payment you choose.
Virginia C. McGuire is a former credit cards writer for NerdWallet.