Are all credit cards Toxic?
Photo by Pablo Stanic on Unsplash
We've all been trained to think credit cards and carrying balances to be toxic to our financial health. That would be true in most cases, but that doesn't mean you should close all your cards, cut them into pieces and never carry one in your wallet or purse. First off, you shouldn't be afraid of them. There are a ton of benefits that come along with credit cards and you should use them to your advantage.
We all shop online and credits provide all of us some insulation from all that can go wrong with spending money online. The pandemic has only created a tailwind for online spending and that's also increased the number of data hacks and fraudulent websites trying to go after your hard-earned cash. Using your debit card instead of a credit card means you immediately part ways the funds in your bank account. Use a credit card and you're leveraging the credit card company's cash. If there's a problem with the order, fraud, wrong item, or a delay - it's not on your dime. How about a product that breaks right after the warranty period? Well, that's happened to be at least a hand full of times. If your credit card has an extended warranty program, you could be entitled to have the product fixed or replaced without any deductible or having to jump through hoops. Some credit cards have decent rewards without an annual fee and that's great, but you shouldn't shy away from the cards that come along with an annual fee. The reason being, some of the added benefits can far outway the cost of that annual fee. Don't be shortsighted on this as it can make you whiff at getting the most bang for your buck.
Points, Cashback, Miles, and such are a huge win if you make two very important choices. First, pick a credit card that provides you the best benefits you're looking for. There's no reason to choose an international airline if you mainly fly domestic etc. This one is a must - spend responsibly. It makes zero sense to buy things you don't really need, just to get the additional miles and such. Those points and cashback are also redeemed tax-free. With potential tax hikes around the corner, we can all use a little break wherever we can get one.
Good credit is extremely important. For those who say they'll pay cash for everything, there will come a time when you will need good credit; perhaps to buy a car, vacation home, or investment property. Credit cards and having access to capital on credit cards will help your credit score. Lavish spending and carrying balances on credit cards can have just the opposite effect; it will hurt you more than the outrageous interest you'll be paying on the balance. Utilization of credit impacts your credit score quite a bit and it's important to keep the cards open as long as you can because longer credit history will also benefit your score.
Promotional offers can be a decent option as a short-term "get out of jail free" card to use on debts carrying higher balances. Where most get in trouble here is doing this without an actual plan. A zero-interest offer for a year or two is tempting for anyone, but don't allow this benefit to turn on your and create more havoc than it should. This is NOT recommended, but I did work with a client back in the mid-2000s that utilized the zero percent offers that carried no fee, and invested those funds into CDs (Not the ones we used to play in our car). He was able to make minimum payments on the balances and collect the interest at the end of his CD term - at the time that was around 6 - 7%!! Anyhow, using credit cards as a part of your overall plan can be a useful tool in building credit, protecting yourself in purchases, shell out some perks in the form of points, cashback, and such.