Introduction to Credit Cards

Credits cards are by far one of my favourite financial instruments. When used properly, credit cards can give you a lot of rewards that cash and debit cards cannot provide. If you don’t use credit cards, you are basically throwing away “free” money. While credit cards are easy to use, I still see a lot of young adults including my closest friends not taking full advantage of this tool. Today, I will provide answers to commonly asked questions regarding credit cards.

Why should I use credit cards over cash and debit?

Credit cards are safer than cash and debit due to the protection and traceability that they provide. Credit card companies have systems that detect fraud/misuse of your card and will alert you immediately. They are also not linked directly to your bank account so you don’t have to worry about people accessing your personal funds. Credit cards also provide rewards and perks as you use them (usually in the form of points or cash back). Last but not least, credit cards allow you to defer payment. Instead of using your personal funds at the time of purchase, you have a set period of weeks to pay the bill. During those weeks, cash that you would otherwise spend on a purchase, can be used to invest or accumulate interest in a savings account.

When should I use credit cards?

You should use it almost every purchase you make! By opting to use cash and debit, you are missing out on various rewards and not taking advantage of payment deferral and the time value of money.

When should I not use credit cards?

People that have trouble with spending and self-control should not use credit cards. The convenience of credit cards will lure consumers to spend more than they would have if they only brought cash. If you can’t pay your bills in full and on-time, don’t use your credit card. People should also not use credit cards if they are looking to support small business owners. Credit card companies take a percentage of the transaction as a fee (2% to 3%). This is especially detrimental to small business owners who typically run on slim margins. In these situations, show your support and pay with cash instead.

What should you look for when selecting a credit card?

a) Eligibility (minimum household income, spending, annual fees)
This is the first thing you should look for when selecting a credit card. Compile a list of credit cards that you are eligible for. Make sure you meet their requirements and are aware of any hidden fees.

b) Rewards (cash back, travel points, retail goods and services, etc…)
This component is going to based on personal preference and lifestyle. Find a credit card with rewards that you can benefit from. If you travel a lot, a card with travel points may be best for you. If you do not have any preference like me, a card with cash back may be best for you.

c) Interest Rates
I know a lot of people look at this factor when choosing a credit card. Personally, I always ignore the interest rate. Rational spenders should never care about the interest rate on a credit card because they always pay their bills in full and on-time. With this kind of mentality and habit, you will not care if even the interest rate is 1000% per annum compounded daily. This ties back to our early question on when someone should not use a credit card. If you cannot pay your bills in full and on-time, DO NOT use your credit card. Interest rates on credit cards range in the 20%-25%. If you need financing, there are better options for that.

Next week, I will begin by reviewing my most used credit card.

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