When I'm standing in a checkout line, I know that I'm going to pay with a credit card, long before the store's card reader asks me. It's not a tough decision. Credit cards, which are accepted just about everywhere these days, offer:
- Ways to earn big rewards with every purchase.
- A means of floating debt for more than a month -- or longer -- interest-free.
- Zero liability for fraudulent purchases.
Debit cards don't. And cash does nothing for me.
Credit cards are better than debit cards. They're way better than cash. Used carefully, they could save you hundreds of dollars every year.
Charging it, strategically
When I say I use credit cards for pretty much everything, I mean it. I charge purchases large and small, online and offline. Many people do the same. But in the '90s, the conventional wisdom was a bit different. Putting smaller purchases and certain essentials, such as gas and groceries, on credit carried a big stigma.
I remember getting raised eyebrows in high school when I paid for a cookie with a credit card at a Whataburger, a silent "Really, was that worth it?" look from the cashier.
Times have changed, thank goodness. As a society, I think we've finally started to see credit cards as tools -- not a scarlet letter announcing, "Hey, everyone, I can't actually afford this thing!" As long as you don't spend more than you normally would on a debit card and you have credit good enough to qualify for the better deals, paying for everyday purchases with credit is the best option. About 64% of families reported using a credit card for convenience and not carrying a balance, according to a 2013 study from the Federal Reserve, the most recent data available.
Gone are the days when charging supermarket purchases to your credit card signified impending financial disaster. We can now pay for groceries with our credit cards -- and earn 6% cash back -- in peace. It's about time.
Here's why you should go for credit next time you're at the grocery store, gas station, burger joint, ice cream parlor, or any other merchant.
1. You can earn hundreds of dollars in rewards.
Many credit cards today come with big rewards, both in the form of sign-up bonuses and ongoing cash back, points and miles earned on every dollar spent. With a few well-chosen credit cards that fit your spending habits, you can easily earn hundreds in cash back, miles or points, without spending any more than you normally would. And you can earn even more rewards with a little strategizing:
To earn the largest sign-up bonus, apply for a travel card during a limited time offer. Travel credit cards tend to offer the largest sign-up bonuses available -- and they can get even bigger during certain times of the year. You'll get an average of $177 more in sign-up bonus rewards when you apply during a promotion, according to a NerdWallet study.
To earn the most ongoing rewards, pair a flat-rate card with a tiered rewards card. Get a card that offers flat 2% rewards and use it with a few tiered cards that offer 3% or more in categories most relevant to you. This strategy helps me earn about $700 in ongoing credit card rewards each year on $30,000 in credit card spending.
Rewards credit cards come with higher interest rates, but for me, these don't matter -- I pay my bills in full every month. Which brings me to my next point...
2. You can float debt interest-free, for a month or longer.
"If you put it on your credit card, you'll have to pay interest on it," a well-meaning person probably told you at some point in your life. But that's not necessarily true.
Almost every single credit card on the market today comes with what's called a grace period. That means interest doesn't start accruing on purchases made until after your payment is due, 21 to 25 days after your billing cycle ends, provided that you've paid in full the month before and you're not using your card for cash advances (getting money out of the ATM) or balance transfers (moving debt from other accounts). Because of these grace periods, I've been able to earn big rewards over the past few years without paying any interest. You can also apply for a card with a 0% introductory APR period, if you want more time to pay down your debt.
This interest-free float period also comes in handy when you're going to a restaurant, hotel or gas station. These outlets often put a hold on your card and settle the final bill later, after you've tipped, checked out or filled up your tank. With a credit card, you won't even notice because by the time you pay your credit card bill, the charges will be finalized. But in some cases, you might get an $80 authorized hold on your debit card when you're buying $5 worth of gas, and that's a drag. You wouldn't be able to touch $80 of your own money until the transaction was settled a couple of days later.
3. Your money is protected.
Credit cards and debit cards look the same, but they handle fraud differently. Suppose your debit card numbers were skimmed when you paid at the self-serve gas station. Even if you noticed the theft right away, the funds would still be missing from your checking account until the bank got around to reimbursing you. That could be weeks later. If you don't notice any unauthorized purchases on your account until two months later, the bank wouldn't be obligated to reimburse you at all.
So debit cards are a lousy protection against theft or fraud. But you know what's worse? Cash. If it's lost or stolen, there's really no hope of getting it back. People turn in sunglasses and sweaters to the lost and found, not $20 bills.
Credit cards offer better protection. If someone skims your credit card numbers, the law protects you from liability, no matter when you report it. You'd be liable for a maximum of $50 if someone stole your physical card and you didn't report it -- but because most banks, including all major issuers, offer zero liability for fraudulent charges, you probably wouldn't owe anything at all.
The odds of your credit card numbers being skimmed are also getting smaller as more retailers accept EMV payments: Most credit cards now come with chips, while fewer debit cards share that feature. If a fraudster gets hold of your credit card numbers, it's still inconvenient -- but it won't bulldoze your emergency fund.
Making the change
Your top-of-wallet payment method should ultimately make your life easier. And that's what credit cards are designed to do -- sometimes in unexpected ways. Some credit cards come with primary rental car coverage, if you decline the car rental company's collision insurance. Certain airline cards let you check bags for free, a benefit that could add up to hundreds of dollars when traveling with your family. And that's on top of the rich reward programs and big sign-up bonuses that so many cards offer.
When you're spending what you normally would, credit cards get you something extra in return. Until your debit cards and cash can do the same, credit is the better choice.
Sean McQuay is a credit cards expert at NerdWallet. A former strategist with Visa, McQuay now helps consumers use their credit cards more effectively. If you have a question about credit, shoot him an email at email@example.com. The answer might show up in a future column.
Photo courtesy of NerdWallet.