Credit cards are a valuable financial tool, but their benefits largely depend on how they are used. When used simply as a method of payment, they provide a secure and convenient method of payment with the added possibility of rewards. When used as a method of finance, credit cards are an extremely costly way to to take out a loan as well as a dangerous temptation to incur debt. For retired individuals, credit cards pose an even greater challenge as both the risks and rewards are exaggerated.
Should Credit Card Use Be Part of Your Retirement Plan?
There are some definite pros and cons to using credit cards during retirement.
The Advantages Of Using A Credit Card During Retirement
Like all credit card users, retirees can benefit from many of the features that come standard with almost all credit cards. These benefits include purchase protections and travel insurance policies as well as the ability to request charge backs for goods and services not received. In addition, reward cards frequently offer rewards in the form of cash back or loyalty points that can be worth 2% of each dollar spent or even more.
For many retirees, using airline reward cards to earn frequent flier miles is an excellent way save money on travel. Another benefit to having and using credit cards is that they help maintain the card holder’s credit score. Part of the formula that makes up your credit score is composed of factors such as the type of credit used and the credit utilization ratio. It is counter-intuitive, but having more credit cards will boost your credit score as higher available credit means that a card holder’s percentage of credit utilization will be lower that it would be with fewer cards and lower limits.
The Drawbacks Of Using A Credit Card During Retirement
None of the above benefits are worth the exorbitant price of interest on credit card debt. If a retiree does not pay his or her entire balance in full and on time, he or she will be responsible for interest payments on all purchases from the moment of the transaction up until payment is credited. Worse yet, retirees are just a susceptible as other to the temptation to incur excess debt. At the very least most workers can hope that they will see a pay increase over time in order to help them to control their debt, while a retired card holder is likely to live on a fixed income. Dipping into retirement savings in order to pay off debt will further decrease the long term payout of hard-earned retirement accounts.
Like any tool, credit cards can be used for good purposes or impose serious dangers. Unfortunately, most Americans have gotten into the bad habit of using their credit cards as a method of financing new purchases. Since credit card habits tend to be life long, those who have had difficulty paying off their credit card balances in full should not continue to use credit cards in retirement. Conversely, those who have been able to use their cards strictly as a method of payment, may continue to enjoy the benefits of credit card use during their retirement.
Jason D. Steele is personal finance writer and a consumer advocate. He specializes in helping people eliminate credit card debt and maximize rewards.
Photo by Dave Gingrich via Flickr