With credit card debt a problem for some people, it’s perhaps easy to overlook how useful credit cards are to our financial lives. Here, as a counter to credit-card skeptics and a reminder to us all, are five key ways that credit cards can be helpful, even invaluable.
1. Building A Credit Score, So You Can Borrow For Less
A credit card is a great way to build a record for your ability to pay off debts in a timely way, and will in turn help build your credit score. A strong credit score helps you to pay less interest on loans, from mortgages to car loans and more.
For example, according to a recent survey by Bankrate.com, people with credit scores of 781 to 850 (Super Prime) customers qualified for new car loans with a 2.6% interest rate, while Subprime borrowers paid 10.65%. That differential means that the Super Prime borrower would pay $355.83 per month for on a $20,000 loan, where the Subprime borrower pays $431.37 per month--some $75 more per month, and $4,532.40 extra over five years.
The impact can be greater still with a mortgage, due to its higher principal and long amortization. For example, according to Fannie Mae, applicants with credit scores of 740 or greater pay an additional .25% in fees for their mortgage, while applicants who score between 660 and 679 pay an extra 2%, for a hefty total of 2.25% in loan fees.
That rate differential dramatically affects the interest costs you’ll pay to buy your home. Specifically, on a $300,000 fixed mortgage with a 4.5% interest rate, you’d pay more than $100,000 more in interest costs over a 30-year term with a mortgage that was 2% higher than another.
2. Ease of Making Travel Payments
It’s easy to forget the hassles of making a downpayment to hold a hotel or other travel bookings in the days before credit cards were widespread. Now, while some hotels accept non-credit card payments such as cash or PayPal, you might have to spend extra time searching for these places. A hotel might also require a big deposit upfront to guarantee payment if you pay with means other than a credit card. They might also charge additional fees on debit card purchases.
Credit cards are also useful as a way to hold a car-rental reservation. But more importantly, owning a card makes things a whole lot easier once you’ve driven off in the vehicle. For one, many cards offer car-insurance coverage that allows you to skip paying the often-pricey collision-damage waiver on your rental. In addition, a card makes the rental process less onerous for you. From a car rental company’s perspective, people without a credit card are a huge risk. According to Thrifty, people who rent without a credit card often undergo a credit check and pay a deposit linked to their debit cards. Car rental companies often refuse to rent more expensive vehicles such as SUVs to customers without a card.
3. Earning Rewards, Enjoying Perks
The panoply of incentives, rewards, and extras offered with cards attests to how much credit-card issuers value loyalty and the frequent use of their cards. Among the most common, and popular, are cashback features that rebate a certain percentage of purchases you make with the card. Other cards allow your purchases to earn points in loyalty programs for airlines, hotel chains, and more. For travellers, in addition to insurance coverage for a rental car, the right card choice can allow you to skip paying transaction fees on purchases you make abroad, to be reimbursed if you need to cancel your trip, or to get free assistance in getting medical help in an unfamiliar destination.
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