Maximizing Your Money: The Benefits and Risks of Credit Cards

It amazes me that I still see so many young adults and professionals not taking advantage of the benefits that credit cards can offer them and that debit cards so subtly take away. I hear from a lot of my friends the argument that their debit card is a visa debit card, so they don't need a credit card as it's just as useful as any other credit card. However, these visa debit cards are still missing all of the benefits of a credit card that are compounded over time and instead takes money directly out of your bank account, taking away your ability to save/invest that money and limiting your financial freedom and ability to grow your credit.

Credit cards can be beneficial in terms of the time value of money because they provide a convenient way to make purchases and access funds without having to carry cash or write a check. Additionally, many credit cards offer rewards such as cashback or points for purchases, which can add value for the cardholder.

The benefit of credit cards can outweigh the risk of debt as long as the cardholder uses them responsibly and avoids paying interest. This means paying the full statement balance on time each month, avoiding overspending, and not using the card to borrow money they can't afford to pay back.

The time value of money refers to the idea that money is worth more today than in the future due to its potential to grow through investment or compounding. By using a credit card, the cardholder can access funds when needed and take advantage of opportunities to earn rewards while also avoiding the opportunity cost of not having access to that money for other purposes, such as investing.

However, suppose the cardholder does not manage their credit card balance carefully. In that case, the debt risk and interest cost can quickly outweigh any potential benefits. Therefore, it is essential to use credit cards wisely and understand the terms and conditions of the card, including interest rates and fees. In addition, I would highly recommend setting up automatic monthly payments, as it can be easy to forget when your credit card payments are due and accidentally start paying interest.

I do understand the fear around credit cards, as around 40% of cardholders carry a balance and pay interest on their purchases; however, that also means that 60% of cardholders are taking advantage of the rewards they receive from using a credit card as well as the ability to hold cash in a savings account before having to pay off the credit card statement at the end of the month. Of course, credit cards aren't for everyone, but understanding their benefits and how they can help you save money can help you decide if they are suitable for you.