Are credit cards a trap? | Briefing v5.0
“Don’t take out a credit card no matter what.”
“Credit cards are a trap.”
“If you get a credit card you’ll fall into debt.”
We’ve heard all of the above since adolescence, even more surprisingly from the mouths of people in authority who should know better. But is it fair to oversimplify and demonize a financial instrument with not only valuable utility, but also exclusive financial incentives?
Are there potential drawbacks to using a credit card? Yes, especially if you’re a reckless spender or unpunctual bill payer. This is why we recommend (and self-practice) two simple rules of thumb to mitigate risk and penalty:
Use credit card(s) as a convenient substitute for cash on already-present spending, not additional spending
We use credit cards wherever, whenever possible. Why? Credit card rewards. Cash provides no incentive and no rewards for using fiat. ‘Plastic,’ on the other hand, yields 1-3% in rewards points or cash back.
You can spend $1,000/mo using cash and receive absolutely nothing, (and be at constant risk of being robbed/losing your wallet), or you can spend the same $1,000/mo and receive $10 - $30 cash back on a recurring monthly basis.
2. Setup automatic payments to pay monthly statement balance
This passively automates the menial recurring tasks of not only paying your credit card on time, but consciously remembering to do so. This will save you time, stress, and inherently prevent you from missing a payment, therefore reducing your chance of a late payment penalty to 0.
Are there any other advantages to using credit cards?
Building credit history. This is the 21st century, and we live in a society predicated on credit. A mortgage for a house, car, small business loan, student loan, are just some of the most common examples of life necessities or assets which require applicants possessing strong credit. And how does one establish good credit history and build a high credit score? Spending on credit and responsibly paying it back on time. Enter your first credit card. (Tip: Start early, start small, stay punctual).
Insurance. Credit cards are insured by their respective financial institution and if lost/stolen, any unauthorized charges to your credit card will be removed from your account’s statement at no personal loss to you.
International Use. Most credit cards have no international fees and can be used universally at vendors in any [first world] country that accepts Visa/MasterCard, etc.