Money expert insists we should all keep our credit cards
Wait! Don’t cut it just yet! Money expert Lacey Filipich says we should all hang on to our credit cards. And there is a good reason.
I have two credit cards. I use them several times a week.
It might sound strange coming from a financial educator, with some of the hottest people in the industry shouting “Cut your credit cards!” at every opportunity. This is a great example of a supposed “rule” that only applies to a group of people, especially those who cannot (or will not) keep their expenses below their income.
If you’re not making purchases beyond your means, you can keep your credit card – and you probably should.
I certainly do. I prefer them to cash whenever I can. I don’t have a debit card and won’t be using Buy Now Pay Later (BNPL).
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Don’t cut your credit cards just yet! Image: iStock
Here are three reasons why:
1 – You Won’t Beat Credit Cards For Fraud Protection
When I saw Frank Abagnale Jr (the inspiration for ‘Catch Me If You Can’) talk to SXSW in 2012, he was adamant about using credit cards only for transactions.
His reason: you are using the money from the bank. Banks care more about this money than your money, so they do everything they can to prevent fraud.
You only have to say “I did not authorize this transaction” to cancel it. Sometimes you don’t even have to. The two times my credit card information was stolen – pretty much inevitable in an online world – I was proactively called by the bank. I confirmed that the questionable charges they spotted weren’t mine, and that was all I had to do. The card was canceled, the charges were waived, and a new card was immediately mailed.
You don’t always get the same level of service when it comes to your money, like with a debit card, where reversals can take longer. I have had clients who have reported delays of several weeks to get reversals on these.
2 – you don’t have pay interest
No doubt about it – credit card interest rates are sky-high. So don’t pay them.
If you can afford to pay off your entire credit card before you get charged interest, then do so.
If you can’t, you’ve spent too much money or your credit card limit is too high.
Both problems can be solved – by you – without resorting to scissors.
3 – You can earn in advance with the benefits
Credit card companies make a lot of money from fees and interest, but you can still enjoy the benefits even if you don’t pay for them.
- Interest-free periods. A typical card will offer 55 days without any interest. It’s almost comparable to a popular BNPL option that requires payments in four installments over eight weeks (56 days). Every time someone tells me “but BNPL is irrelevant!” I subconsciously roll my eyes, thinking “a credit card too if you pay it off as quickly as BNPL demands”.
- If you are going to spend money anyway, earning points for that expenditure is a bonus. Especially if the points can be used somewhere you shop. For example, one of my credit cards issues points that I redeem for grocery coupons.
- I have personally taken advantage of the free travel insurance a few times and will do it again once the trip gets easier (these days are coming!) Read the fine print and get independent advice on whether the policy is right if needed.
Before you start looking for the best credit card deals, know that you can go down the rabbit hole by optimizing your life around credit card bonuses. Unless you have the time and inclination to do the mental math to get the most of these benefits, try to keep it simple.
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Lacey says she prefers cards to cash. Image: iStock
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How to make friends with your credit card
A credit card is just a tool. Only a poor worker blames his tools. This little piece of plastic isn’t inherently bad – it’s the way it’s used that becomes a problem.
Start by mentally converting the name “credit card” to “debt card” and then use it wisely by:
- Choose an offer that suits you. You don’t have to subscribe to an interest rate of 29%. There are cards with less than half of that, and you shouldn’t plan on paying interest anyway (I don’t even know the rates on mine. See point 3 below). The annual fee is also not mandatory, although I gladly pay for both of me, as I receive cash benefits that are double the value of the fees.
- Keep your limit as low as possible. Most cards allow a limit of $ 500 or $ 1,000. Even if you find yourself paying it manually several times a month, a low limit helps prevent overspending. When you see your card is at max, take a moment before paying it off – are you doing it because you’re spending on impulse? If so, maybe give yourself 24 hours to decide if what you’re buying is worth it. It also helps limit the risk of fraudsters racking up a massive bill.
- Automate your monthly payment. Complete an automatic payment request to pay the balance owed in full (not the minimum repayment) each month. Keep enough money in the linked bank account via the automatic payment instruction to cover your card limit (or typical monthly expenses if lower).
- Verification of your transactions. Scroll through the contents of the card each month in case Fraud Protection has not detected an erroneous transaction. Ask those you don’t recognize.
- Never use the cash advance option. Credit cards charge interest on cash advances compounded daily. Avoid this unless it is life or death.
Know your own habits and limits
As with anything else personal finance, this is a choose-your-own story.
If you * know * you’ll succumb to easy-to-trigger expenses, don’t buy a credit card. If your budget is tight and you’re worried that you can’t keep up with it if you add this plastic, then don’t. If you have a system that works and you don’t want to change it, that’s fine too.
But don’t rule out credit cards just because someone told you to. They are a useful tool when used well.
Lacey Filipich is the author of Money School: Become financially independent and take back your life. She is a financial educator, chemical engineer and TEDx speaker.