Credit cards can get you in a lot of trouble. But that doesn't mean you need to stop using them. Used the right way, credit cards can give you huge benefits you won't find anywhere else.
Going Cold Turkey
Recently, Wall Street Journal columnist Brett Arends wrote about how he's giving up on credit cards entirely and going all cash. He cited some advantages to dumping his plastic, including greater privacy, studies that suggest that people spend less when they use cash instead of credit, and the simple idea that using credit cards benefits big Wall Street bank executives at the expense of local merchants.
All those things may be true for some people. But before you decide that it's worth it to cut up your cards and toss them in the trash, keep in mind that you may be different from the average person -- and might be giving up a lot by resorting to an all-cash lifestyle.
Reason 1: The Rewards
The right credit cards pay huge rewards. Arends largely dismisses them as not worth it, but many people like the idea of saving $0.20 a gallon on their gas. A 5% discount on rotating categories of purchases -- which companies like Discover Financial (DFS) and JPMorgan Chase (JPM) offer -- can save you sizable amounts of money. And as long as you were going to make those purchases anyway, why shouldn't you get some money back?
Even if you're just getting 1% to 2% in cash back, that's more than a drop in the bucket for many families. Spend $40,000 a year -- not a crazy amount for many middle-class households -- and you're talking about $400 to $800 back in your pocket. That's not chump change.
Reason 2: The Convenience
The number of people who pay ATM fees is appalling. But for many people, finding an in-network ATM when they're on the run simply isn't worth the hassle, so they'll happily end up paying $2, $3, or even $5 just to grab their own cash from their bank account.
Sure, there are still some places that don't take plastic. But most of the time, credit cards make things easier. And especially in situations like renting a car; trying to pay by cash and meet a rental car company's policy regarding an extra deposit can be next to impossible. With your credit card, by contrast, you just swipe and go.
Reason 3: The Float
Part of how Warren Buffett got rich is by using the "float" between when insurance policyholders pay premiums and when they make claims against their policies. Credit cards let you use the same trick, albeit on the much smaller scale.
As long as you pay your balance in full, you don't pay a dime in interest, but get as long as a month and a half between when you buy something and when you pay for it.
Of course, with savings rates at next to nothing lately, that doesn't get you a whole lot of income. But when savings accounts start paying 5% again, like they did before the financial crisis, that float becomes worth something.
Reason 4: Easy Tracking
Have you ever tried to budget by cash? The other day, I saw someone pull out an envelope at the grocery store that clearly held the person's budgeted money for food. Sure, it can work, but it involves carrying a bunch of cash around with you -- and making sure you have the right envelopes at all times.
In contrast, with a credit card, you have an easy backup. If you lose a receipt, you can go online and see all your spending going back as far as you care to look. That can help you be more realistic about how you actually spend your money -- and thereby make it easier to plan budgets for the future.
Reason 5: The Credit Score Boost
Perhaps the most important reason to keep your credit cards is to avoid deep-sixing your credit rating. Cut up your cards all at once and your available credit will fall through the floor, potentially making your credit score fall. On the other hand, if you pay dutifully every month, you may not make your card company happy, but everyone who looks at credit scores -- and these days, that can include not only lenders, but also insurance companies and even potential employers -- will feel a lot more comfortable working with you.
Play Your Cards Right
Used the wrong way, credit cards can be very dangerous for your financial health. But if you can make the most of them, they will serve you well.
Motley Fool contributorDan Caplinger took his last vacation on ridiculously generous credit card rewards. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of JPMorgan Chase. Motley Fool newsletter services have recommended buying shares of Discover Financial.