To a child's or young adolescent's mind, credit cards sound like the greatest deal in the world. You buy something today and get to enjoy it immediately, but you don't have to pay for it for weeks. Where's the downside?
Only an adult could complicate the situation by knowing that the due date for paying the bill without incurring interest is coming. Adults also know that letting that date pass will allow the interest to start building and the foundation to be laid for a future four- or five-digit credit card balance.
Let's assume that you're a responsible credit user who understands that a $20 scarf bought with a credit card on January 1 remains a $20 scarf if paid for by February 1, but can magically transform into a $20.29 scarf if paid for on February 2. If so, then there's a surprising credit card strategy you should employ as a consumer - use your credit card for everything.
If an establishment takes cards, use yours. Keep the cash transactions to a minimum. Let's examine why.
The Time Value of Money
Inflation, however infinitesimal, will happen between the time you make a purchase and your payment's due date. Postponing payment makes your purchase that much cheaper. Beyond that, your cash will spend more time in your bank account, and the more of it there is available, the greater its ability to grow via interest.
Credit Cards Keep Vendors Honest
Say you hire a tile setter to set some tile. They spend the weekend cutting, measuring, grouting, placing the spacers and tiles and letting the whole thing set. They then charge you $4,000 for their troubles.
If you're the kind of person who shudders at the thought of placing anything on a credit card, you draw upon your savings account and write a check. But what do you do when, 72 hours later, the tile starts to shift and the grout still hasn't set? Your entryway is now a complete mess, and that vein in your forehead won't stop throbbing.
You can take the issue up with your state licensing board, but that process could take months and the contractor still has your money. Pay for a big-ticket item like this with a credit card. The issuer has an incentive to discourage fraud among its vendors, and if there is a problem, they have a mechanism to try to resolve it. If you dispute the charge, the card issuer withholds the funds from the tile setter, and not only will you get your money back, you might even get help finding a new contractor.
Rewards are the ne plus ultra, the undeniable reason why paying with plastic beats paying with cash in almost all cases. The cash-back credit card was first popularized in the United States by Discover, and the idea was simple: use the card and get 1% of your balance refunded regardless of what you bought or where you bought it. Today, the concept has grown and matured. Some cards now offer 2%, 3% or even as much as 6% back on selected purchases.
Your credit card rewards options are almost endless. Get a co-branded card issued by a gas station chain, a hotel chain, a clothing store or even a nonprofit organization like AAA and your rewards may increase even faster. The trick is to find the card that best fits with your spending patterns. Doing the inverse - altering your spending patterns to fit with a particular card - is foolish. But if you're already spending a few days a month patronizing a particular hotel or airline, why not use the card that will encourage your continued patronage by offering you discounts?
When Paying with Credit Isn't Better
However, paying with credit cards isn't always better than paying with cash. Retailers honor credit cards because they want to make it easy for you to shop there. But the merchants still have to pay the major credit card companies a cut of about 1.5% of every sale. The merchants don't mind though, because 98.5% of a sale is better than the 0% they'd get if you wanted to buy something but didn't have cash.
That being said, since a cash sale means more to the retailer's bottom line than an equivalent credit sale does, some retailers give discounts for the privilege of taking your cash immediately. On a big item, like a furniture set, the difference could be substantial. However, you'll forego the previously mentioned consumer protections offered by credit cards.
The Bottom Line
Credit cards are best enjoyed by the disciplined. Shift as many of your purchases as possible to your credit card, but remain cognizant of your ability to pay by the due date. If you do, the combination of rewards, buyer protection and the value of cash-in-hand will put you ahead of those who deal strictly in green.
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