There are many people who’ll tell you to stop using credit cards if you want to get out of debt. The problem with this advice is, a credit card is just another tool, like a knife. Used improperly, you can hurt yourself, but if you use it correctly, it can actually help you get out of debt. Here are 3 reasons why you should use a credit card if you want to get out of debt and/or save.
1. Credit Card Rewards
When you use a credit card, the merchant is charged what’s known as the MDR (Merchant Discount Rate). This rate generally ranges between 2-3%. For example, if you spend $100 at a store, the store will get $97-98, with Visa/MasterCard taking a small cut, the merchant acquirer taking a small cut, and the issuing bank taking the majority of the $2-3. The bank uses its cut of the MDR to pay for credit card rewards. If you used cash instead, the merchant would get $100. In both scenarios, you’re spending $100, but with a credit card, you actually get money back. Sounds like a no-brainer to me.
If you get a credit card, look for one that gives at least 1% cash back, although you can find some that give up to 2% cash back. If you spend $10,000 and put it all on a card, that’s $100-200 in cash you get back every year. Like I said before, this is basically free money.
What if You Only Like to Spend Money You Have
Clearly, it only makes sense to use a credit card for purchases if you pay off the balance every month. With late fees and interest rates as high as 25%, you’ll pay a lot more than what you earn in rewards if you miss or are late on a payment, so using a card requires discipline. But let’s be honest: saving and paying down debt requires discipline. If you can’t control your spending with a credit card, you’re probably not going to be able to save much even if you just use cash.
2. 0% Interest Balance Transfers
Many credit cards offer 0% introductory balance transfers. If you have any debt at a high interest rate, you could save a lot of money by moving this balance to a 0% card. If you have $10,000 in debt at 8%, transferring it to a 0% card would save you $800 in a year! The important thing to remember is that you need to pay off the balance completely before the introductory period is up. So only transfer what you know you can pay off during the introductory period. If you don’t, the card company will charge you interest on the full balance, not just what you have remaining at the end.
I remember a long time ago (it feels like forever) when I would get so many of these balance transfer offers in the mail. I would then take the maximum amount in cash, and then move all this cash to a savings account. Back then, interest rates were around 5%, so it was easy money. If you did this with $10,000 at 5% interest, you could make $500 for free! Sadly, rates are nowhere near 5%. With interest rates closer to 1%, you won’t make much doing this right now.
3. It Improves Your Credit Score
Your credit score is one of the most important numbers in your life, right below how many beers you can chug and how many times you’ve been in love. Hint: for the latter, the answer is always one.
Having a credit card and consistently paying it off in full not only gives you a credit history, but it’ll increase your credit score as well. You shouldn’t underestimate the importance of your credit score. You’ll need it to buy a home, a car, and even get a job. Improving your credit score not only increases your access to credit, but it can lower the rate you’ll pay as well. So make sure no credit/bad credit isn’t preventing you from getting what you want in life.