This guest post from Justin McHenry is sure to be controversial. Though I just spent three weeks using a credit card while on vacation, I’m still wary of them. McHenry has some thoughts for people like me.

When people ask me what I do and I tell them I run a credit card comparison site, they generally look away, as if I’ve just said I’m a pimp. Or a crack dealer. Or a crack-dealing pimp. When I tell them credit cards aren’t all bad, they’re skeptical. You probably are, too. I might not be able to change your mind, but if one less person in the world thinks I’d give cigarettes to an asthmatic, this post will have been worth it.

Used properly, credit cards can offer you some real benefits. (Yes, used poorly they can ruin your life, but that’s been established elsewhere. I’m here to give you a few positives.)

Before his trip abroad, J.D. mentioned getting his first credit card in a long time. He talked about the dangers of doing so, but he also exhibited what I’d consider the mindset of a responsible credit card user. This mindset can be summed up in a single sentence, which you should make your credit card mantra:

“I pay off my credit cards on time every month.”

Follow that simple rule and credit cards will be your best friends, keeping you cool in the summer, warm in the winter, etc. When you have made paying off your bill completely each month a given, instead of an option, or a wish upon a star, you have the mindset to take advantage of the two main benefits of credit cards: (1) convenience and (2) protection. Let’s look at each.

Convenience
Walking around with a lot of cash leaves you vulnerable. Vulnerable to losing it, vulnerable to having it stolen. And it requires repeated stops at ATMs when you run out, which can be a major hassle. Credit cards solve this problem. You can use them almost anywhere today, for even the smallest purchases.

In addition, credit cards are often necessary for travel, especially if you book airline flights online or want to make advance reservations for a rental car or hotel. In many cases, you simply can’t do these things without a credit card. At best, it’s a hassle. Maybe that’s fair, but it’s reality.

Also, when you travel abroad, as J.D. has just done, a credit card allows you to make purchases more easily and often more cheaply, without having to pay international ATM fees or deal with travelers checks.

Protection
If you lose your credit card, or someone steals it and hits the bars, your credit card company can not legally make you liable for any more than $50 of those fraudulent charges; in reality, most credit card companies won’t charge you at all, because they want to keep you as a customer.

Credit cards also protect you as a buyer. If you make a purchase and the item breaks, or is lost while being delivered, or a company won’t give you a refund, your credit card company will go to bat for you. Call them up, say you want to dispute a charge on your card, tell them why, and in most cases they’ll erase your debt and go after the merchant that stiffed you. Now it’s between them—as far as you’re concerned, the matter is over.

But Wait! There’s More!: Bonus Benefits
There are two more fringe benefits to consider, although I believe they are less important.

  1. Over 75% of the credit cards on the market today offer some sort of rewards program, whether it’s getting a small percentage of cash back, points toward merchandise and gift cards, or airline miles. In most cases, these reward programs are free—you don’t pay an annual fee to get them.  So, as long as you are following your mantra (“I pay off my credit cards on time every month.”), you get free stuff for using your credit card. These rewards can be lucrative if you’re a big spender, but I suggest you only think of them as fun extras; otherwise you can become obsessed with racking up points and do something stupid with your credit card.
  2. Credit cards are a free short-term loan. While I don’t suggest you think of them as free money, I do suggest that you think of them as a convenient way to save yourself from forking over big wads of cash for no reason.  Example: You want to book a flight today, while rates are lower, for a vacation that won’t occur for two months. If you even have the option to pay cash, it will mean paying an awful lot upfront for something you won’t be using for a while. A credit card lets you make that purchase quickly and easily, with no interest for the month in between when you bought the ticket and when your credit card bill is due.

Credit Cards’ Evil Ways
If you think I’m a shill for credit card companies, let me set you straight by telling you this: Credit card companies want you to screw up. They want you to forget your mantra. They want you to pay off only part of your balance, pay it late, maybe even go over your credit limit. When you do, they’ll pounce, gleefully charging you out the wazoo for each mistake and showing no mercy when you say “It’s never happened before” and “Can’t you make an exception this one time?” These days, credit card companies are making less and less money from interest charges and more and more from fees, so they need you to screw up.

The solution: Don’t screw up.

A Word About Debit Cards
Debit cards have increased in popularity, especially among younger people. If you can’t internalize the mantra “I pay off my credit cards on time every month,” then by all means go for the convenience of a debit card and the protection from buying what you can not afford.

However, three words of caution on debit cards:

  1. Debit cards do not offer the same protections as credit cards. First, they offer little extra benefit if you have a dispute with a merchant. Debit card purchases are treated the same as if you made a cash purchase. You may get your bank to help you, but who has your money? The merchant, who is under much less pressure to give it back.
  2. If debit cards are lost or stolen and used fraudulently, you could be charged much more than you would be for a lost credit card—only $50 if you report it within two days, but after that up to $500, depending on how much the card was used. (After 60 days, you’d have to totally eat the fraudulent purchases, but who would not know their debit card was stolen for 60 days?) In addition, if you try to use your card while you are unaware that someone is fraudulently emptying your bank account, this could lead you to make purchases without money in the bank to cover them, leading to the equivalent of bounced check fees. And, of course, when your debit card is used fraudulently, your money is gone from your bank account, and it may be weeks before the situation is handled and the money is restored. Contrast that with a credit card, in which the money you’ve used to make purchases is the bank’s money, not your own, so you do not lose cash when fraud occurs.
  3. This may be a personal thing, but debit cards can make it difficult to keep track of how much money you have to spend. Because you make purchases without getting a running total of how much is left in your account, you must keep track in some way, whether it’s using a checkbook-type ledger or just checking your balance online often. In short, a debit card requires discipline. (In that way, debit cards and credit cards are definitely the same.)

Thank you for reading. Now I’ll go back to stealing candy from babies.

Justin McHenry is Research Director for credit card news and comparison site IndexCreditCards.com. He also blogs about personal finance at Zen Personal Finance.

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This article is about Choices, Credit Cards