I’ve written much on the subject of credit cards—mostly that they aren’t your friend, but more like having an enemy living in your own camp. I’m not backpedaling on any of it; credit cards have been the enabler that has led many to financial ruin. But are there actually times when you DO need a credit card?
Absolutely. Even a zealot like me is prepared to admit to that.
There are at least five reasons why having a credit card is a “must”—just as long as you don’t overdo it by running up your balance and applying for- and loading up on- more cards. (No, credit card rewards isn’t one of them—I’ve never bought that argument.) Used responsibly, there are situations in which a good credit card is well worth having.
1. On large purchases, where buyer protection is requiredI like debit cards for routine transactions, but when it comes to major purchases—the sort involving large dollar amounts and the possibility of a dispute—credit cards are the way to buy. It’s your ultimate protection against a transaction gone wrong.
Debit cards can offer the same ease of purchase, but they don’t offer the level of protection you’ll get from a credit card. If you need to dispute a transaction on a credit card you can file a dispute claim, and if the claim is substantiated your credit card issuer can refuse to pay the purchase. And since merchants and businesses who deal with major credit cards have ongoing relationships with the card companies, a transaction can even be charged back after settlement (within certain limits of course).
I’ve been through a couple of disputes myself, and have found that in most situations the credit card issuer will side with the buyer—that’s me and you—most of the time.
We shouldn’t need to think this way on a routine basis, but for those times when you have your doubts about a merchant or a purchase, credit cards shine as a method of payment.
2. International travel and transactions
Credit cards have grown up a lot in the past few decades—and not just up, but also out—as in out across the globe. Credit cards are accepted all over the world and even in places we might not think they would be. This is a good thing because they offer a serious advantage over other forms of payment.
For one thing, as discussed above, credit cards offer buyer protection, which becomes all important when your transaction goes sour in another country where you’re the foreigner. In that situation credit cards become the equalizer. You have no idea what commercial laws are in various countries and what recourse you have against a local proprietor, but you’ll still have a leg up because all vendors are beholden to their credit card arrangements—if they want to get paid. That speaks very loudly even in places where no one speaks your language.
3. As a back-up to a well funded emergency fund
Even an emergency fund needs a back up plan. One of the limitations of emergency funds is that it’s impossible to plan completely for all that can happen—that’s why they’re called “emergencies”. We can never know exactly how severe any given emergency will be, or even if we might be hit by more than one.
Make sure your emergency fund is well stocked—credit cards should never be a substitute for emergency savings. Then have a credit card with a large unused balance, just in case your emergency fund isn’t up to the emergency (or emergencies) you’re facing.
4. To establish or maintain a respectable credit profile
I’ve written it before, and I’ll repeat it here—don’t obsess on your credits scores! There are plenty of issues in life that warrant our concern, and this isn’t one of them. That said, having decent credit is preferred to the alternative. Credit cards are one way to make that happen, especially if you don’t have a mortgage or other form of debt.
The flip side—too many credit cards, with oversized balances and a poor payment record will undo all that you’re trying to do. Limit the number of credit cards you have (one or two should be enough), pay balances off monthly and make your payments on time. Poor payment is a primary reason why credit cards are frozen or terminated by the issuer, and once this happens you’ll be left with a debt to pay and no more access to credit.
5. For certain transactions like airline tickets you do need a credit card
There are certain transactions where using cash or checks just won’t work, and debit cards aren’t much better. One is purchasing airline tickets—credit cards just seem like the way to go here. Another is when a transaction could result in add-on fees after the fact. (In certain transactions there is fine print language that grants the vendor just such flexibility, though they won’t emphasize the point in their sales pitch.) A credit card gives you a cushion (the credit limit) that’s beyond the initial purchase amount, which is something you don’t have with a debit card.
Credit cards CAN be an asset—used responsibly, and under the right circumstances.
Can you think of any other situations in which having a credit card would be a distinct advantage over debit cards, checks or cash?