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Every time you shop, you make a decision whether to pay by card or cash. Paying cash makes it easier to stick to a budget, helps you stay out of debt, and keeps credit card costs at bay. On the other hand, credit cards come with a lot of perks that make them attractive to use for everyday spending.
While the decision ultimately comes down to personal preference, we’ve laid out a few pros and cons of using your credit card for everyday expenses.
Advantages to Using Your Credit Card for Everyday Expenses
By far the best reason to use your credit card for everyday expenses is the ability to earn cashback and other rewards. There are credit cards that offer rewards for different kinds of spending such as on groceries or gas. You are bound to find one that matches your spending habits. Even more, credit cards offer rewards in multiple forms such as cashback, miles for flights, or free hotel stays.
When you find the perfect credit card that matches your spending habits and offers rewards you’re likely to redeem, it’s a no-brainer to use it for everyday expenses in order to rack up the most rewards. Of course, you shouldn’t spend aimlessly just to get more rewards. But why not earn rewards for using your credit card for purchases you would make anyway?
Payment history makes up about 35% of your credit score. In order to contribute to the payment history component of your credit score, you need to have bills to pay. Charging everyday expenses to your credit card is a simple way to make sure you have something to pay off each month. The extra credit can also improve your credit utilization.
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When you pay your credit card bill on time each month, you are contributing to your payment history and building your credit. We all know the benefits of having a high credit score — a better chance at getting approved for loans and lower interest rates, to name a couple.
Most credit cards offer purchase protection for a limited period of time after you buy something. This means that if the item is defective or gets stolen, you can report it to your credit card company and seek reimbursement. The exact terms vary from company to company, but overall it’s an excellent benefit to have.
When you purchase something with cash, your only method of seeking reimbursement is through the store from which you bought the product. We all know refund policies differ greatly and can often be a big headache.
American Express is known for providing comprehensive purchase protection. With an eligible credit card, your purchase is protected against theft or accidental damage up to 90 days from that date of purchase. Upon a successful claim, you’ll be reimbursed the full amount of the charge to your credit card.
When you carry a credit card, you have the purchasing power of whatever your credit limit is without the risk of carrying that same amount of cash. Most of us wouldn’t feel comfortable walking around with thousands of dollars in our pockets. When you carry your credit card, you are essentially maintaining your purchasing power while eliminating the risk of losing your money.
If your credit card is stolen, you can easily report it and have your card canceled. You won’t be responsible for any charges made after you’ve reported your card stolen. On the other hand, if your cash is stolen, there’s little you can do to get it back.
We all know how important budgeting is for staying on top of your finances and reaching your financial goals. Using credit cards for everyday expenses makes budgeting easier. Since credit cards are linked to online accounts, you can easily track your transactions upon logging in.
You can link your credit card to a service like Empower to track your spending or download your transactions into a spreadsheet. Either way, using your credit card for those expenses eliminates the need to enter your expenses manually and ultimately saves you time.
(Personal Capital is now Empower)
Disadvantages to Using Your Credit Card for Everyday Expenses
Ease of Spending
Credit cards make spending money a little too easy. When you’re not handing over hard cash, you can easily become detached from your money. Swiping your credit card just doesn’t create the same feeling that using cash does. Swiping your credit card seems like less of a big deal. In fact, a consumer research study found that people focus more on product features than cost when using credit cards over cash.
This ease of spending can lead you to spend more than you would have had you been using cash for everyday expenses. When you’re constantly swiping your credit card, you may lose track of your balance. What’s worse is that you may even get yourself into debt by spending so much that you’re not able to pay the bill in full each month.
Lower Credit Score
Amounts owed makeup about 30% of your credit score. Your credit utilization ratio (the amount of credit used divided by the total amount of credit available) is an important factor in your credit score. You want to keep it as low as possible. However, using your credit card for everyday spending can cause your credit utilization ratio to go up, particularly if you don’t pay off the balance in full each month. A higher credit utilization ratio will lower your credit score.
If using credit cards for everyday expenses causes you to carry a high balance, reconsider this approach. Or, you can ask your credit card company for a limit increase to keep your credit utilization ratio low.
Fees and Interest
This disadvantage is mainly for people who don’t pay their credit card bill in full each month or are otherwise not as responsible with their credit.
If you miss a payment, you’ll be charged a late payment fee. These are usually around $25 to $35 dollars. Miss a payment by more than 30 days and it could be reported on your credit, impacting your score for the next 7 years.
If you don’t pay your balance in full each month, the remaining amount will begin to accrue interest. Credit card interest rates are typically in the double digits. So, the interest on your balance can add up quickly the longer you don’t pay it off.
Paying fees and interest is a major downside to using your credit card for everyday expenses. You’re better off just using cash if you have a problem paying your balance in full each month.
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In my opinion, the pros of using your credit card for everyday expenses outweigh the cons. Who doesn’t like free money, miles for flights, or hotel stays? Using your credit card more frequently will help you earn those attractive rewards more quickly.
While it may not be at the top of your mind, purchase protection is also another major perk to using credit cards for everyday expenses. You never know when an item you bought will break or get stolen. More often than not, stores aren’t able to offer the same protection your credit card can.
The cons of using your credit card for everyday expenses are definitely valid. However, they apply more to people who are less responsible with credit. If you are careful with your spending, watch your balance, and pay your bill in full each month, you shouldn’t have much of a problem on those fronts.
Ultimately, it comes down to personal preference.
Are you the type of person who likes to feel cash in your hand and find that you manage your money better that way? Or are you the type that doesn’t mind electronically tracking your spending while racking up rewards?