9 reasons to love credit cards

By Liz Pulliam Weston

A reader recently mistook me for someone who hated credit cards. He wanted to enlist me in his battle against evil plastic and spread the word that credit cards were the gateway to debt hell.

But he picked the wrong woman. I hate credit card debt. But I love credit cards.

In just the past few months, credit cards:

• Helped me resolve an ongoing dispute with a software company.

• Protected my purchases from theft or damage.

• Provided two free airplane tickets for a recent family trip.

• Gave me insurance coverage on a car rental.

• Knocked 3% to 5% off the cost of some business expenses with no effort on my part.

• Allowed me to pay bills on time, also with no effort, while boosting my credit score.

I get all these goodies largely because so many other folks play the credit card game so badly. The profits they generate for the credit card issuers essentially pay for my freebies. Consider:

Most folks who have credit cards carry a balance. Only about 40% of us, or 30% of U.S. households overall, regularly pay our balances in full. Credit card issuers still make money from our transactions, thanks to fees charged to the merchants, but that amount pales compared to the sums collected from people who carry balances. Merchant fees are typically 3% or less, while the average interest rate is 13.98% for a credit card, according to IndexCreditCards.com.

Many don't bother to redeem. Half of those polled in a 2006 survey had rewards cards, but 41% of those cardholders never or rarely redeemed their rewards, according to the survey, done by Harris Interactive for GMAC Mortgage. That's a lot of accrued miles, rebates and points sitting around unused.

Many have no idea what benefits their cards offer. If they did, more people would likely take advantage of them -- which might cause the issuers to dial back.

But I'll take the risk and let you know what you might be missing.

A tool, a penny-pincher, a guardian

As I said, I love credit cards, and if you're a responsible consumer, there are plenty of reasons you should love them, too. Credit cards provide, in alphabetical order:

Arbitration. What consumer hasn't gotten cross-threaded with a store or other company over a purchase? You try to resolve their mistakes, only to run into brick walls with uncaring or unavailable customer-service staffs. Enter your credit card issuer, which is sworn to investigate and mediate disputes. And so far, this customer has always been right.

My latest spat was with an antivirus-software company that failed to send me the required serial number that would allow me to use its program. I sent repeated e-mails and left phone messages, but the company's only response was to send me a CD of the program -- again without the necessary serial number -- and charge me again for the unusable software. All I had to do was alert American Express, and the issuer promptly removed the company's charges from my bill. (To preserve your federal rights, you'll want to make such complaints to your issuer in writing. Even if you make your initial complaint online or on the phone, follow up with a letter sent certified mail, return receipt requested, and keep the paperwork. I've never needed it, but the documentation is good to have if the dispute gets ugly.)

Automatic bill payment. Life is complicated; I like to make it simpler. One way is by charging regular bills to credit cards that are promptly paid off each month (also by automatic payment). As a savvy consumer, I still take time to parse through the transactions as they're downloaded into my personal finance software every few days. But I no longer have to worry about missing a due date, which helps preserve my credit rating (more on that in a minute).

Bulwark against identity theft. When I pay with a check or a debit card, I'm providing a potential pathway into my bank account. And once a thief raids your bank account, getting your money back can be a struggle. Plus, you often have to close your account and open a new one to prevent future incursions. If a thief gets my credit card or credit card number -- as one did a few years ago -- all I have to do is report the theft in a timely fashion (typically within 60 days of the account statement being issued). The bogus charges are erased from my account, I'm issued a new card and life goes on.

Continued: Credit improvement

Credit improvement. Credit cards can help you build or restore your credit rating. As long as you pay your bills on time and use only a portion of your credit limit (under 30% is good; under 10% is even better), you're helping to polish your credit scores. All of us need to worry about our credit standing these days, as the credit crunch makes getting loans tougher and more expensive for those without good credit scores. Credit information is also used by employers, insurance companies and landlords, so it pays to be vigilant.

Extended warranties. Our platinum MasterCard doubles any manufacturer's warranty to extend up to a year beyond the date the original expires. American Express and Visa's Signature cards offer similar benefits. Consumer Reports tells us most extended warranties are a waste of money, but you can't beat the price of this one.

Interest-free loans. If you pay your bill in full every month, you're essentially getting an interest-free loan on every purchase you charge. Some folks take this concept further, using 0% offers to extend their interest-free loans for months, or even using the money to invest (see "0% daredevils chase 'free' cash"). I'd advise this only if you have enough cash in the bank to pay off the loan on a moment's notice. While the Credit CARD Act will soon bring big changes for cardholders, under current law, credit card companies can change virtually any rate or term on a whim. You don't want to rely on them to keep their promises about that low rate lasting "for the life of the balance" or any other period of time.

Purchase protection. Higher-end cards tend to come with several types of insurance, including coverage if something you buy is stolen or damaged. Our platinum MasterCard, for example, provides "Purchase Assurance," which pays to replace or repair items purchased within the previous 90 days. Visa Signature and American Express have similar benefits.

Rental car coverage. Our auto insurance provides most of what we need to waive the rental car companies' expensive coverage. My business VISA and our platinum MasterCard fill in the gaps, covering our deductible and charges such as "loss of use" that aren't part of our auto insurer's plan. ("Loss of use" is the extra charge rental cars levy for the days a car is out of service being repaired.)Rewards, rewards, rewards. How do I count the ways? Plane tickets, hotel stays, cash back, discounts . . . a month doesn't go by that we don't reap some reward from our cards. One of my new favorites is my business Amex card's Open Savings program, which gives me discounts ranging from 2% to 20% with nearly two dozen companies, including airlines, hotels and package-delivery services. I don't have to do anything to get the rebate. I just use the card with those companies, and the discount is applied to my purchase.

Our other cards require a little more effort to redeem rewards. I keep track of our point, mile or rebate total on each, and make sure to regularly cash them in.

If you don't like your rewards card, chances are you've got the wrong card. Check out "20 credit cards that pay you back" to see if there's a better fit.

Of course, not everyone is a good candidate for a rewards card, or even a credit card, for that matter.

Some people simply can't control their spending; to them, a credit card is the equivalent of a drink to an alcoholic. If that describes you, you're wise to steer clear of plastic.

If your situation isn't so dire, but you do carry a balance, then look for a low-rate card so you can pay off your debt as quickly as possible. Let the rewards wait; being debt-free will be the best reward you can earn.Liz Pulliam Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "Your Credit Score: Your Money & What's at Stake." Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board and helps middle-class families cope at Building a Brighter Future.

Updated March 19, 2009