Cash is king. Debt is evil. That was my mentality for the longest time. And it served me pretty well. At 27 years old, I did not have a single cent of debt to my name. No student loans, no credit card debt, no car loans. EVER.
I paid cash or used a debit card for everything. Using a debit card is essentially paying cash, but easier to manage than carrying around bills and change. I did have one credit card, but I never actually used it.
There was nothing wrong with what I was doing. In fact, it was significantly better than most people my age as most were strapped with debt.
But I finally discovered that switching from a debit card to credit card could be even better.
Once I made the switch from debit to credit, I never looked back.
Here are the primary reasons to switch from a debit card to credit card:
1. Credit Card Rewards
The main reason for making the switch from debit to credit is that you can basically get paid for doing nothing. Every purchase earns you points or cash back, typically giving you 1-6% of value back.
The biggest change between using a debit card versus a credit card is that you have to pay your bill once a month, which takes about 30 seconds.
What’s the catch?
The catch is that you have to pay your credit card statement IN FULL every month. You can’t allow yourself to only make minimum payments where you’ll end up paying 20% interest. Paying 20% to save 2% is clearly a losing proposition.
However, paying 0% to save 2% is a no brainer!
As long as you pay your statement in full each month, you never have to pay a penny in interest. If you think about the impact over a lifetime, you’re talking about a lot of money. In a single year, we got over $13K of value from credit card rewards.
Simply treat your credit card like a debit card. If you don’t have the cash to pay for it now, you can’t afford it.
2. Extra Cash Available
Something that isn’t discussed as often as credit card rewards is the impact on your available cash. With a debit card, each transaction comes out of your bank account immediately.
For credit cards, an entire month’s worth of transactions are lumped together in a single bill, which you then have 3-4 weeks to pay. That means you’re delaying the cash outflow from any single transaction anywhere from 3-8 weeks.
Now, this doesn’t affect your net worth at all.
Whether you pay with a debit card and decrease an asset or use a credit card and increase a liability ends up being the same result — your net worth decreased.
That’s what expenses do.
Let’s say you typically put $2,000 of spending on your debit card each month. Instead of the cash outflow of $2,000 occurring throughout January, now you wouldn’t actually make the payment until the end of February.
As a result, you’ll be floating about $2,000 to $4,000 at any given time. Having this cash on hand adds a lot of value. All of a sudden, you just increased your emergency fund!
If you already have an appropriately sized emergency fund, you could use the funds toward paying other debt or investments. It’s basically a short-term interest free loan… that you keep rolling into another short-term interest free loan over and over again.
3. Build Credit
The other major benefit of using a credit card instead of a debit card is that it helps you build credit. A good credit score is important to qualify for a mortgage or car loan as well as get better interest rates.
Even if you’re the type that pays cash for cars and prefers renting to owning, credit scores are still relevant to you. Many apartments or landlords do credit checks before approving tenants. Not to mention utility, phone, cable/internet providers, and even employers also check applicants’ credit. Bad or no credit can lead to getting denied or paying more money upfront.
There is a myth that in order to build credit, it’s better to carry a balance month-to-month. Meaning you intentionally don’t pay the full statement balance.
This is completely false!
I once worked with someone who had family members touting this advice. It’s unfortunate to see how poor money management can get passed down from one generation to another.
As long as you’re following the rules of proper credit card usage, you can build up your credit history and improve your credit score.
Related: 13 Credit Card Rules You Must Follow
There are some prominent figures in the personal finance industry, such as Dave Ramsey, that advocate not using credit cards at all. Very much in line with my previous thinking that “Cash is king. Debt is evil.”
I view credit cards now like driving a vehicle. If you misuse them, it’s reckless driving. It would be much safer to not drive at all and take a bus. But, if you simply learn to drive responsibly, you can reach your destination just as safely as the bus. And most importantly, you can get there faster.