Alessio enjoys writing about finance and ways to better manage money.
Credit cards offered with astonishing awards, promotions on interest rates meant to convince people to overspend and make debts even for non essential expenses: these are maybe the most common deals offered by banks, still, how much are you getting an advantage from them? There are some people who believe they are beating the system if they can earn awards on awards by swiping their credit card multiple times and, while it is partially true that one can in theory beat the banks at their own game and earn more than what they spend, reality is different. Banks are not no-profit associations meant to give away rewards or lend money at discount prices. People who believe they can trick their bank because of some additional rewards are the first ones to get defeated in the game: there is always someone who earns money and someone else that is going to lose and yeah, the bank does not belong to this last category, otherwise what’s the point in offering services to the customers and even paying for doing it? It is like if a restaurant used to pay customers to eat their dishes or a shop used to giveaway objects and pay people seeking for them.
The Hidden Traps of Credit Cards
A mentality which seems common in the USA is to consider credit cards as must-to-have financial tools. It is commonly stated that without a credit card one couldn’t improve their credit score rating, benefit from perks or get a good anti-fraud protection. Surely, not everything is wrong with these statements, still, there are some things that need to be better explained:
- rewards are good as long as they are earned on the basis of real needs. People who buy just to get rewards, maybe by also making unneeded transactions, are spending more than what they truly need, are maybe also making debts by not paying in full their balance, so they are going to spend more money than what they could earn from rewards: the mechanism is not different than what happens during sales, as these may make people buy things just for the discounted price, and not for a real utility;
- anti-fraud protection is good on credit cards because, while the bank is investigating on eventual reported fraudulent transactions, no money is taken off the account, while suspicious transactions involving debit cards have the consequence that money is instantaneously taken off and so it may be challenging to cover other expenses while the bank completes their investigation: still, keeping a good emergency fund on the account and setting spending limits on a debit card so that, even in case of a fraud, no more than the set plafond can be spent, is a good alternative to limit damages as, in this case, only a limited amount will be taken off the account and, in addition, the emergency fund is going to help afford all the other expenses while the bank analyzes the anti-fraud claim;
- while credit cards are often considered the only tool available to guarantee a hotel reservation, many hotels are still accepting debit cards, eventually by taking off some money as a guarantee and giving them back later: again, having an emergency fund and giving a debit card as a guarantee can be still an alternative to credit cards that may works in many situations (the writer never had problem giving debit card as a guarantee even in hotels in the USA, the country of credit cards for excellence).
The dealer always wins
Are Credit Cards a Must-to-Have Financial Tool?
One can conclude that credit cards are maybe comfortable, but that they are not as indispensable as most people believe. Getting a credit card may be good only in two situations, provided that, in any case, it is used like if it was a debit card, so without overspending and by clearing balance every month, so that no interest rate is applied:
- if annual fee of the credit card is free (there’s no point in paying an annual fee for getting a tool that, with a correct usage, becomes very similar to a debit card, especially if earned rewards are less than the paid fee);
- if real and needed transactions made with credit card (so without overspending just because of the rewards) generate more perks than what is spent with the annual fee.
In this case one is effectively outsmarting their bank or credit card company. In all the other situations, credit cards would be a better deal for the bank than for the customer and sticking to a debit card would be surely the best solution. Rewards are appealing because, for every person who uses their credit card wisely, without carrying a balance and by spending only what needed, there are maybe many other people making debts on debts and overspending. As written before, banks are not charity and so they are not giving away rewards because of their generosity: maybe, if everyone used to manage credit cards very wisely, there would be no more point to offer rewards, as in this case the bank would really lose money, just like casinos would not exist anymore if, for every winner, there wouldn’t be much more people losing their money.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2022 Alessio Ganci