‘I don’t use cash’: I’m 70 and my home is paid off. I live off Social Security, and I use a credit card for all my spending. Is that risky?

I am financially stable. I have no debts of any kind. I own my home (a boat) free and clear, and have no payments on my automobile.

I have always been reluctant to pay for things using a debit card. My worry is that if my debit card ever gets stolen and there are fraudulent charges, that money comes directly out of my checking account. Even if I reported its theft, it might take time to get the money back.

As a result, I don’t use cash. I always pay with a credit card rather than a debit card. I don’t carry any credit-card balances. I budget my money carefully and pay all my credit-card bills in full every month.

My question: Is there a downside to my using credit cards in my current limited financial situation?

Retiree

Dear Retiree,

With convenience comes great responsibility — and risks.

There’s a big difference between living on credit and using a credit card for your spending. You fall into the latter category, and you are paying off your card every month while racking up rewards, air miles and other perks. Debit cards do not, for the most part, offer rewards. 

Credit-card companies also make returns easier, and you have more fraud protections with these cards. For instance, almost all credit cards on the market offer “zero fraud liability” on fraudulent charges, meaning you won’t pay a penny on them.

The credit-reporting company Experian recommends that you set up an automated payment every month to pay off your credit card in full, assuming that you have enough money in your bank account to cover it, and also text alerts for when you are approaching your spending limit.  

I would urge you to take advantage of all the credit-card perks, but also have at least six months’ worth of emergency savings for any unforeseen events, such as damage to your home or a medical bill that you have to pay out of pocket. One bad event could upend your life.

No one plans to get caught in a cycle of credit-card debt. It happens slowly or suddenly, and often through impulsive spending. The risks are great: The average credit-card interest rate currently hovers at 20.3%, the highest rate recorded by CreditCards.com. 

That interest rate is a good motivation to keep on top of your monthly bills. Credit cards help you build a credit score, but you should also aim to keep your credit-card utilization rate — that is, your balance as a percentage of your credit-card limit — low.

Some people indulge in credit-card churning — opening new credit cards to get the sign-on bonus, and closing the cards before the next annual fee kicks in. When you open a card, the bureau does a “hard check” on your credit, which can hurt your credit score.

My colleague Leslie Albrecht recently wrote a Financial Face-off column comparing buy now, pay later (BNPL) to credit cards, and chose the latter due to the high interest rates for many BNPL loans, and the lack of protections afforded by BNPL compared to those of credit cards.

But Ted Rossman, a senior industry analyst at Bankrate.com, also had this timely warning about the risks inherent in credit cards: “There’s a saying in the industry that credit cards are like power tools. They can be really useful or they can be dangerous.”

He’s not wrong: If you made an average monthly minimum payment of $26.67 on a $1,000 credit-card balance with 20% interest, it would take you more than 9.5 years to pay off the capital and interest. 

Tailor your credit-card spending to your lifestyle. Choose cards that offer cash back on purchases at supermarkets and stores that you shop at regularly. With an uncertain economic outlook, some credit-card companies are showing signs of tightening their belts (i.e., lowering their limits).

That’s as good a motivator as any for the rest of us to do the same.

You can email The Moneyist with any financial and ethical questions related to coronavirus at qfottrell@marketwatch.com, and follow Quentin Fottrell on Twitter.

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