Credit cards are a staple of modern life.
In fact, the average American has not one, not two, and not even three credit cards. According to CNBC, the average consumer has four credit cards to their name!
There’s a reason for such popularity: credit cards help people build credit, cover unexpected costs, and earn exciting rewards along the way.
The question remains: do you need a credit card?
In this blog, we’ll cover six major credit card benefits can enhance your financial life.
An Overview of Credit
What is “credit,” exactly? You’ve probably heard of “good” credit, but how exactly one build credit?
In short, credit is the ability to borrow money with the promise that you’ll pay it back by a mutually agreed upon date.
The sum of all your credit products — i.e. your credit cards and personal loans — are evaluated by the three major credit reporting bureaus, Experian, TransUnion, and Equifax.
Your credit history, therefore, is a record of your overall success in timely repayment.
For the sake of convenience, your credit history is often presented as a FICO® score, which ranges from 300 to 850.
Scores under 580 get an official “Poor” rating that “demonstrates to lenders that the borrower may be a risk.”
Conversely, FICO® scores over 670 are considered to be “Good,” and therefore “demonstrate to lenders that the borrower is very dependable.”
A credit card, then, is a powerful financial tool to help you build credit. Should you decide to obtain a card, be sure to use it wisely.
Never borrow more than you can afford, and always make your monthly payments on time.
After all, your payment history is responsible for 35% of your credit score!
6 Great Benefits of Credit Cards
While a credit card is chiefly a credit-building tool, it has plenty of other benefits to boot.
Here are six reasons to consider adding a credit card to your financial arsenal:
1. You’ll Get Better Rates on Insurance
Tired of paying pricey premiums for auto or home insurance?
Strategically using a credit card — and building better credit — may help lower your rates.
After all, many insurance companies use credit scores to determine their prices.
According to recent auto insurance studies, consumers with “poor” credit paid 61% higher rates than those who had “average” credit.
In contrast, those with “very good” credit saw rate reductions of nearly 25%!
Other studies confirm that drivers with lower credit will actually pay over $2,500 more per year than drivers with higher credit.
The facts are in: better credit can help save with insurance premiums.
2. You’ll Get Better Access to Utility Services
Poor credit can even complicate something simple like utility services.
According to the Federal Trade Commission, “Getting utility services — gas, electricity, water — has a lot to do with your credit history. The better your credit history, the easier it will be for you to get services.”
Unfortunately, if utility companies sense even a modicum of risk, they may charge a deposit or even ask for a letter of guarantee (i.e., a friend or family member who accepts responsibility for any unpaid bills).
With strong credit, however, you can expect to get utility services with no deposit or guarantor required.
3. You’ll Have More Housing Options
If you’ve ever rented an apartment in a major metropolitan area, you know how difficult it can be to get approved with less-than-perfect credit.
That’s especially true in up-and-coming and in-demand neighborhoods.
With good credit, however, you’ll gain a competitive edge when you apply to rent an apartment.
Plus, good credit plays an influential role in your ability to get a mortgage with a reasonable interest rate. As the Consumer Financial Protection Board admitted:
“The better your credit history, the more likely you are to receive a good interest rate on your mortgage loan.”
4. You’ll Be Able To Earn Awesome Rewards
There are countless credit cards on the market.
Every time you turn on the TV or search the internet, credit card ads compete for attention.
Oftentimes, card companies will tout their enticing “rewards” (including frequent flyer cards, points systems, and cash back).
In other words, the more money you spend, the more rewards you’ll get back.
This is a key differentiator from debit cards, which typically offer very little beyond the ability to complete transactions.
So long as you make your payments on time, you’ll continue earning points, travel miles, and cash back on the credit card(s) you’ve chosen.
Note: As a welcome gift, many cards will even offer signing bonuses to help you get started.
While these deals can be very alluring, be sure to read the fine print before you sign on the dotted line.
5. You’ll Enjoy Greater Security and Protection From Fraud
Credit cards can provide a meaningful layer of financial protection.
After all, every time you use a credit card, you’re technically making purchases with the credit card company’s money, not your own.
If a fraudulent purchase appears on your credit card statement, you won’t lose any money, and you can swiftly report the incident and have it removed.
However, fraudulent charges made on debit cards can be much more difficult to reverse. Once funds are deducted, they’re gone.
With credit cards, however, you can easily notify the card company of fraudulent transactions. And in many cases, the credit card will notify you of suspicious charges to protect your best interests.
Note: Many credit cards also come with consumer protection perks and extended warranties for major items like electronics, furniture, and appliances.
6. You’ll Be Able to Access Rental Cars, Hotels, and More
If you frequently travel, a credit card is a truly essential tool to have.
In most cases, you’ll need a credit card to book rental cars and hotel reservations.
For example, many hotels and car rental agencies will place a hold on your credit card — usually worth several hundred dollars — to protect themselves from any potential damages incurred during your stay or rental.
Such processes are much harder to manage on a debit card.
Note: If you travel overseas, many merchants won’t accept a debit card. Be sure to have a credit card on hand to help handle expenses and exchange rates.
Moving Forward
Let’s review the benefits of having a credit card (and improving your credit):
- You’ll get better rates on auto and home insurance.
- You won’t have to pay deposits on utilities (or find a guarantor).
- You’ll have greater options in finding the apartment or home of your dreams.
- You’ll qualify for even better credit cards with exciting rewards and cash back.
- You’ll enjoy greater financial security and protection from fraud.
- You’ll have broader access to rental cars, hotels, and lower exchange rates (when traveling overseas).
It’s clear that having good credit plays an integral role in your financial life.
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