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Don't Cut It Up! Why Credit Cards Still Matter

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That piece of plastic in your wallet is crucial to your long-term financial health.

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Credit card companies have recently become Public Enemy Number One.

During the past nine months, banks have been gearing up for the Credit Card Act, implementing numerous "anti-consumer" policies on the way. That, on top of the events of the past few years that put many in unmanageable debt, left some wondering if they should even have a credit card at all.

But the real question is: Why wouldn't you have a credit card?

Credit cards don't put people in debt, people put themselves in debt. Regardless of the regulations attached to credit cards, when used effectively (with the same mentality you would use with a debit card or cash), they can only make life easier.

In day-to-day life, they allow you luxuries such as renting a car and reserving a hotel room. While a credit card isn't required to do these things, the fact is that doing them without a Visa (V), Mastercard (MA), or American Express (AXP) makes it harder than it has to be.

Cash works at very few car rental agencies and hotels that accept cash probably also recommend that you bring your own sheets. When using a debit card, some companies, such as Avis (CAR), reserve the right to put a hold on the attached account.

At Avis, the authorization holds on debit cards are a minimum of $500, and this is in addition to other potential security measures, such as performing a credit check on customers or requiring last month's cell phone bill. Even if you ignore the potential for embarrassment and the now-limited availability of funds, the time wasted is reason enough to have a credit card.

In case of an emergency -- which you very well might have after sleeping in a hotel that accepts cash -- credit cards act as an insurance policy, allowing you to spend money you don't yet have.

While this aspect of credit is what instigates the love-hate relationship many have with their credit cards, it's undeniably a perk -- one that you shouldn't have to use often, but should feel good about having.

From a basic financial standpoint, using a credit card continues to one-up other methods of payment. A credit card tracks all of the purchases, pays the vendors, and then bills you for the total. This keeps your account stable from bill to bill and allows your money to keep earning interest. Debit cards and cash instantly withdraw from bank accounts, hindering the time customers have to accrue interest.

Credit cards also offer security when shopping online, merchant protection, and rewards that can earn you some extra money.

But those points are all relatively minor, and alone they probably can't persuade someone to want a line of credit. However, credit is an intangible asset that you will encounter -- most likely at the most vulnerable and hectic times of your life.

Your credit score will come up in almost every milestone: buying a home, getting a loan, applying for a job. And it's not something you can have shipped over night (15% of your FICO score, a popular score used by lenders, is based on the length of credit history).

Credit is something you have to start accruing early and stay on top of, because when you probably need it most (for example, after getting laid off) is precisely the time you won't be able to get it. Now facing consumer-friendly restrictions, banks such as JPMorgan Chase (JPM), Bank of America (BAC), and Citigroup (C) can be more stringent when it comes to who they offer credit to.

Society has set up credit as the grown-up version of proving responsibility. Those with good credit are rewarded with things such as lower interest rates or airline miles, and are granted access to certain privileges, such as financing their own small business.

So while it's probably possible to swim through life avoiding the need for a credit card, that path severely limits financial growth and leaves few options aside from the cheap hotel room.

For the opposing view of why you can live without credit cards, click here.

Read more about the current state of credit here.
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No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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