Beating Broke

Personal Finance from the Broke Perspective

Why I Prefer to Pay with a Credit Card

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Two credit cards sitting on a table

I’ve been interested in personal finance, budgeting, and money management for at least 25 years. During that time, I have repeatedly seen the advice to pay cash to best manage your money. Proponents argue that paying cash limits spending and makes you feel pain, so you won’t want to spend as freely. However, I prefer to pay with a credit card. I’ve tried paying with cash, and I find it a hassle.

Why I Prefer to Pay with a Credit Card

There are several reasons why I prefer to pay with a credit card.

Keep Track of Spending

When I pay with a credit card, I can keep track of my spending. Whenever I pay with cash, I forget what I bought and have no record unless I got a receipt and saved that. With my credit card, I can go to the credit card statement and see what I spent where.

Convenience

Paying with a credit card is more convenient. When I experimented with using cash, two things often happened. First, I would forget my cash, get to the store, and realize I had no money. I’d have to drive back home to get my cash. Second, if I went to a gas station, I didn’t feel comfortable leaving my young children in the car alone while I paid. I would have to get them out of the car to pay the cashier in the store. What a pain! Swiping a credit card at the pump was easier and safer.

Accumulate Rewards

I always use credit cards that have rewards programs. We pay them off at least every month, sometimes weekly. Because we use the cards responsibly, we aren’t stuck paying interest fees.

When we lived in Arizona, I used the credit card rewards to pay for our trips back home to Michigan. I would save rewards for a year or two until we had enough money to finance our trip. Now, my husband and I have moved closer to family, so we are using the rewards to plan international travel.

Extended Warranties

Many credit cards offer extended warranties. For instance, we recently bought a laptop and a new dryer. We charged both purchases on our American Express card because American Express offers extended warranties, saving us money from purchasing additional protection.

Rental Car Insurance

Another perk of paying with a credit card is that some cards offer car insurance for rental cars. Rental car insurance can run several hundred dollars, so this is a considerable saving. However, ensure you know what card offers this service and use that car to pay for your rental.

Protected from Theft

Thief dressed in black with a black mask holding a stack of money

If you carry cash and lose your money or it’s stolen, you’re out of luck. That money is gone. However, if you use a credit card and someone fraudulently charges something, the credit card company will erase that charge. You are not responsible. That alone is an excellent reason to pay with credit cards rather than cash.

Maintains Credit Score

A sound credit card is essential for low car loans and mortgage interest rates. In addition, a good credit score can save you money on your car insurance and help you rent an apartment.

When you use a credit card regularly and pay it off, you help build or maintain your credit score. Cash cannot do that.

Two Drawbacks to Paying with a Credit Card

Of course, there are two drawbacks to using a credit card for most of your spending.

Credit Cards Get Stolen

I have never had it physically stolen in the more than 25 years I’ve used credit cards. However, I have had people make, or try to make, fraudulent charges at least four times. Each time, the credit card company caught the fraud, often before the purchase went through. However, the company then had to cancel my card and issue a new one, which was inconvenient. I could not use my credit card for a few days while waiting for the new one, and I had to change all my autopayments that used that particular credit card. Even worse, if I forgot to change all of them, some companies billed me a $20 missed payment charge since the credit card was no longer valid.

More recently, I had a scammer steal my credit card rewards points, but the credit card company refunded them for me when I noticed.

You May Overspend

If you are not disciplined and lack a budget system, you may overspend when using credit cards. When I was in my 20s, a friend said she thought of credit cards as “free money.” Unfortunately, many think this way and mindlessly spend more when using credit cards instead of cash.

How I Handle Credit Cards in the Budget

To avoid overspending, I use my credit card only for purchases I had already budgeted for. For instance, we use You Need a Budget (YNAB), and I have a separate category for dining out. So if I only have $20 in the dining out fund, and the family wants to go out to eat, we don’t at that time because there’s not enough money in the dining out category. So, by utilizing my budget in this way, I can avoid overspending on my credit card.

Likewise, this year we needed to buy a new dryer. When ours stopped working last week, I charged it with no qualms because I had enough money in my home maintenance fund to cover the purchase.

Final Thoughts

Choosing to pay cash or use a credit card is a personal decision. I prefer to pay with a credit card because it helps me monitor my spending easier than using cash. Because I combine my credit card usage with my budgeting, I rarely overspend on my credit card. In addition, we pay off our credit card each month (or earlier), so we do not have to pay interest fees. If you currently have a credit card balance, paying with cash until your credit card is paid off may make more sense.

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The Biggest Reason to Always Pay with a Credit Card

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Reason to Always Pay with a Credit Card

Some financial advisors and gurus urge all of their audience to use cash only. They argue if you use cash, you can’t overspend. Further, they say you’re also more conscious of your spending when you use cash. While these arguments may be true for some credit card users, they’re not for all. Many people can use credit cards and stay within their budgets. In addition, paying with credit cards offers several advantages, one of which is particularly important.

The Biggest Reason to Always Pay with Credit Card

The biggest reason to always pay with a credit card is the purchase protection. I saw this in effect recently with my mom and a $450 treadmill she purchased last fall.

The Credit Card Purchase

My mom is trying to improve her fitness level, so last September, she bought a treadmill on Amazon. The treadmill was never perfect—she complained about how hard it was to walk on it. When I visited her recently, I tried the treadmill, and it felt heavy and slow. A few days into my visit, the treadmill would turn on and off, but you couldn’t get the tread to move.

Customer Service Was a Bust

We discovered the treadmill company is in China, and the only phone number for support was a Chinese number. I emailed support and told them what the problem was. The company took two days to get back to me and then asked for a video demonstrating the problem. I sent that and then waited another two days for a reply. Next, they told me how to disassemble part of the treadmill and send them more videos showing the problem. I did, and then I didn’t get a reply for several days.

Contacting Amazon Didn’t Help

Meanwhile, I contacted Amazon to ask for a refund. Amazon said they couldn’t help me because the return window closed in December. When I mentioned that the treadmill had a one-year warranty, Amazon said I had to work with the manufacturer.

Customer Service Still Refused to Help

Reasons to Always Pay with a Credit Card

By now, I had been going back and forth with the treadmill company’s customer service for approximately 10 days. Finally, I said I wanted a refund as the treadmill was under warranty and shouldn’t break after five months of ownership. The company told me to contact Amazon to activate the warranty, which I had already done, to no avail.

Contacting the Credit Card Company Made the Difference

I then contacted the credit card company and explained what had happened. After taking down all the details, the credit card company issued my mom a full refund. Having the ability to go straight to the credit card company to get a refund when all else fails is the biggest reason to always pay with a credit card.

Final Thoughts

My opinion to always pay with a credit card, especially with large purchases, was reaffirmed with this situation. Further, I learned that when purchasing something on Amazon, checking out reviews is not enough. I must also verify where the company is based. A company based in China may be challenging to work with and receive assistance.

We used my mom’s credit card refund to purchase a new treadmill from a company based in Arkansas. If she has trouble in the future, I’m confident communicating with the company will be easier.

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Credit Cards as Emergency Funds

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Everybody knows they need an emergency fund.  Right?  Right.  There’s some argument about how much to keep in your emergency fund, but the general rule is no less than $1000 and ideally 6-12 months of expenses.  And common savings strategies says that you should keep that money in a nice comfy savings account that you can access as needed.  But, let me play devils advocate for a minute here.  Let’s say you had $1000 in your emergency fund.  What could you do with that $1000 if it were freed up and spendable?  What if, instead of having your emergency fund in a savings account, you used a credit card that had no balance on it?

You read that right.  A credit card.

Take you’re average credit card with a $1000 to $5000 credit limit (higher if needed) and keep no balance on it.  You’ve got a ready made source of funds, up to the limit, that you can access from just about anywhere.  And, it frees up your emergency fund savings to pay down debt.  Or invest.  Or, you can still keep it in a savings if you want and just use the credit card to supplement the emergency fund so you don’t have to keep such a high balance on it.

Pros and Cons (My wife likes these lists and always makes me write one when making big decisions…)

Let’s look at the pros for using a credit card as an emergency fund.

  • Cash is freed up for investing/paying down debt.  Why earn 1% on your emergency fund cash when you could be paying off debt that you’re paying 10% or more on?  Or, that you could be investing and possibly earning a nice return on?
  • No balance needed.  The card would be dedicated to the emergency use, so you wouldn’t carry a balance on it unless you had an emergency.
  • Available anywhere.  You can instantly access your emergency fund from anywhere your card is accepted.  Which is virtually anywhere.

Now, let’s look at the cons for using a credit card as an emergency fund.

  • Card could be closed.  If you don’t carry a balance and never need it, there’s a chance that the card company could close your account and you wouldn’t be able to use it when you needed it.  There are ways around that.  You could use it for a specific bill each month and then pay it off just like you would if you were paying the bill normally.  Problems could arise if you don’t pay that balance though and fill up the card.  Then you wouldn’t be able to use it either.
  • Interest charges.  Nobody likes paying interest on anything.  If the emergency is big enough and bad enough that you aren’t able to pay it off right away, you’ll start racking up interest.  That can lead to a quick spiral into the same debt boat that you were in to begin with.  Or worse.

I don’t know if I could recommend using a credit card as your only means of an emergency fund.  But, I think you could make a pretty good argument for using one to supplement your current emergency fund.  Let’s say your goal is to have 3 months expenses in your emergency fund.  And that your expense are $5000 a month.  That’s $15000 that will just be sitting in a bank doing nothing more than earning 1% interest. If you’ve got a card with a $10000 limit on it, you could pare that down to just $5000 in the bank and use the other $10000 to pay off a bill.  Or invest in something.

I think the biggest problem with using a method like this is the potential pitfalls.  If you are unable to keep the card active and balance free, you’ll have problems using it when you need it.  If you do need it and are able to use it, but not pay it off, you could potentially end up in the deep water again.  On the other hand, if you use up a cash emergency fund, you still need to pay it off, but you won’t have to pay interest on the part you used.

Using a credit card as an emergency fund is doable.  But, I can’t suggest it for any but the most disciplined.  One wrong step, and you could end up having more of an emergency than you would have normally if you just had a cash emergency fund.  And that could lead to disaster.

What do you think?

Now, I want to know your opinion.  Would you consider using a credit card as part (or whole) of your emergency fund?  What about using a line of credit as an emergency fund source? Would higher interest rates on savings change your mind? What pros and cons did I miss?