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If I will pay most of my expenses via credit card, then is it correct to assume the following points?

1) My saving account interest rate will increase by somewhat (interest is calculated upon daily balance) because previously I use cash or Debit card when I go shopping, which means expenses are be deducted from my Debit Card (link with my saving account) instantly.

2) I can also earn some amount of money back because of my cash back credit card. Previously I used a debit card which offers quite lower cash back percentage than the credit card (0.3% usually at least 1%).

What other advantages are there?

Important point to assume: I will pay the Credit Card bill immediately upon receiving it, thus no need to worry about recurring interest for credit card.

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    You have enumerated all the good points. What is your QUESTION?
    – Dilip Sarwate
    Commented Aug 10, 2012 at 3:51
  • 1
    my question is my assumption of 1,2 are correct or not? and want to know more advantages if any.
    – kitokid
    Commented Aug 10, 2012 at 4:00

4 Answers 4

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You have 3 assumptions about the use of credit cards for all your purchases:

1) May be a moot point. At current interest rates that will not make much of a difference. If somebody links their card to a checking account that doesn't pay any interest there will be no additional interest earned. If the rate on their account is <1% they may make a couple of dollars a month.

2) Make sure that the card delivers on the benefits you expect. Don't select a card with an annual fee. Cash is better than miles for most people. Also make sure the best earnings aren't from only shopping at one gas station or one store. You might not make as much as you expect. Especially if the gas station is generally the most expensive in the area. Sometimes the maximum cash back is only for a limited time, or only after you have charged thousands of dollars that year.

3) It can have a positive impact on your credit rating. I have also found that the use of the credit card does minimize the chances of accidentally overdrawing the linked account. There is only one big scheduled withdraw a month, instead of dozens of unscheduled ones.

There is some evidence that by disconnecting the drop in balance from the purchase, people spend more. They say I am getting X% back, but then are shocked when they see the monthly bill.

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  • But what exactly is the use of credit rating?
    – Pacerier
    Commented Nov 27, 2013 at 11:46
  • The credit rating score is used as part of the decision to extend credit to a consumer, or to set the interest rate they will be charged. Low score implies larger risk of not paying back to loan. Other uses include setting of insurance rates, and as part of a credit check by a landlord.
    – mhoran_psprep
    Commented Nov 27, 2013 at 12:23
  • Hmm, so we get a tainted score just by delaying the payment for 1 month? Or does the negative effects only kick in if we defer payment for a couple of months?
    – Pacerier
    Commented Nov 27, 2013 at 12:25
  • It depends on how quickly the company reports the late payment. It also depends on what the lender is looking for. Some mortgage companies will ask for a written explanation for every late payment.
    – mhoran_psprep
    Commented Nov 27, 2013 at 12:27
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  1. Correct. By putting expenses on to a credit card which does not charge interest during the grace period, and paying that balance every month, in effect you earn interest on money you've already spent.

    However, first, savings account interest is something like .05% right now depending on your bank. Yeah it's money, but seriously, that's 4 cents per month on $1000.

    Second, two things can make this very wrong. If you carry a balance, you'll pay much more in interest than you'd get from practically any investment you could make with the cash in the meantime. Second, a debit card can be used to get cash you already have from an ATM (not everyone takes credit, you know), and it'll cost you little or nothing. Use a credit card for the same purpose and you're paying 40% from the second the money comes out of the machine.

  2. Also correct. Rewards cards earn you more the more they're used. That's because the card issuer makes money based on usage; they get 3% of each transaction. They're happy to turn 1% of that, up to a limit or subject to a spending floor, back around to you.

    Again, check the terms and conditions. Most cards have a limit on total rewards. Many of them also have fees, either while you hold the card or when you try to redeem the rewards. Look for a card with high limits or no limits on rewards from spending, and with no annual fee or reward redemption fee.

  3. In addition to the above, you build good credit history with good spending patterns. However, your credit score can fluctuate wildly, because on one day you have very low leverage (percent of credit limit used), and on the next you've bought $200 in groceries and so your leverage went up 20% on a card with a $1000 limit. Leverage under 10% is good, leverage under 40% is OK and leverage over that starts looking bad. With a $1000 limit, with you maxing it out and then paying it off, your credit score can fluctuate by 30 points on any given day.

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  • But since credit reports are only updated monthly, would the score really fluctuate much?
    – MrChrister
    Commented Aug 10, 2012 at 17:41
  • Depends on the regularity of the spending; it's based on the average daily balance of the account (so that you can't carry a huge balance, pay it on the first, then rack it back up quickly). Large spending early in the month will increase the ADB more than large spending late in the month, increasing leverage, reducing score.
    – KeithS
    Commented Aug 10, 2012 at 17:43
  • @KeithS Can I ask u more about 3rd point as it makes me so curious :) Due to your answer, you said that leverage 40% is ok and over that starts looking bad. So..in ur example: (1) I should only use 400$ out of a card with $1000 limit ? and you pointed out Large spending early in the month will increase ADB,leverage and reduce Score. (2) Thus I feel doing like that is limiting the convenience of using Credit Card? (3) So, what is the point of carrying credit card with 1000$ limit if I should only use 400$ ? Please Assume: I won't overspend and plan to pay for only necessary things.
    – kitokid
    Commented Aug 11, 2012 at 2:21
  • Leverage ratio isn't a huge ding on the score, and provided you don't carry a balance it's one that's easily restored (just pay off the card). So, I wouldn't worry about it for now. If you want to buy a house, switch to your debit card and a checking account for a few months while all the paperwork goes through, to keep your score more consistent.
    – KeithS
    Commented Aug 13, 2012 at 16:50
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There are lots of things to consider in addition to your questions. The rules changed in the US recently.

  1. I think you mean you will save more money. Your interest rate isn't likely to go up, but your principle will, so you will earn more interest income than before. I would wager it won't be a significant amount however.

  2. You can certainly earn a reward, either cash back, points, miles or something else.

BUT the sticking point with earning things with your card is harder than before. Due to rules changes, merchants can now recuperate the fees they pay for accepting your credit card. Rewards cards have a higher fee than non-rewards cards (because banks aren't in charities). So now, depending on the merchant's choice, you could see a higher cost paying with a credit card (or a debit card) and that cost could wipe out your reward.

And if your card has a fee, it has always been true that you need to evaluate the annual fee to confirm the benefit is more than paying for the fee.

Additional advantages to credit cards

  • You often get extended warranty periods on purchases for free.
  • The laws in a dispute are more favorable for a credit card than a debit card
  • In case of fraud you are protected as you have to settle up a credit card opposed to having the money disappear with a debit. It is harder to retrieve money than it is to not pay a bill.
  • Some cards have additional insurance protection for purchases and rentals
  • Some cards can be tied to a savings program
  • Some cards offer one time usage numbers for online shopping
  • When a merchant wants a deposit, it is better to use a credit card rather than commit funds from a checking account with a debit card for a deposit.
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  • What benefits does "Some cards can be tied to a savings program" give?
    – Pacerier
    Commented Nov 27, 2013 at 11:47
  • @Pacerier - it helps people save money. Some people aren't disciplined enough to add money to a savings account, so any sort of automatic process is a boon.
    – MrChrister
    Commented Nov 27, 2013 at 18:55
  • @MrChrister - maybe this is a subject for another question, but can you link information about rule changes relating to merchants recouping costs?
    – NL - SE listen to your users
    Commented Jan 9, 2014 at 23:45
  • @NathanLiddle- business.ftc.gov/documents/… and usa.visa.com/personal/using_visa/checkout_fees
    – MrChrister
    Commented Jan 10, 2014 at 4:56
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Assumptions 1 & 2 are correct. Plus you will improve on credit score.

The only disadvantage is if you get lax about it and overspend beyond your limit ... Plus a small risk of fraud of card transactions ...

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  • Can you elaborate on the fraud of card transactions? How is fraud possible with credit cards?
    – Pacerier
    Commented Nov 27, 2013 at 11:58
  • credit card fraud is a subject in itself. There are multiple ways, card skimming, theft, card loss ... ofcourse there are quite a few protections these days ... hence the risk is small
    – Dheer
    Commented Nov 27, 2013 at 16:16
  • hmm but even if I lose my cc, banks these days would surely cancel payments not made by me right?
    – Pacerier
    Commented Nov 27, 2013 at 16:19

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