Before you ditch credit cards, think about this

The variable interest rate on consumer credit cards is likely to rise if Congress fails to reach a deal to raise the debt limit. As Chip Reid reports, rates could go up between one and five percent.
CBS/AP

During the recession, many folks turned away from using credit cards and choose to pay with debit cards, checks and cash. It's been two years since the Credit CARD Act passed and Americans are still wary of credit cards. But that may be changing as there appears to be a slight increase in credit card usage.

It's hard to argue with someone who decides to not use a credit card. But if you decide to close your credit card accounts altogether, consider what you could be giving up and be prepared to deal with the limitations and risks of using other forms of payment. Here are a few things to consider:

Transaction Protection: When you make a purchase with a credit card, there is a legal firewall between your bank account and the vendor, thanks to the Fair Credit Billing Act of 1974. When you use a credit card, the bank issuing the credit card makes the payment to the vendor from its funds. You are obligated to pay the bank only after you have agreed that the charge is legit and that the item or service you bought was delivered as agreed. But make that transaction with a debit card and the payment is immediately deducted from the funds in your bank account. Federal laws and bank's policies include protections from fraudulent or unauthorized transactions due to debit card theft. But before a questionable transaction is sorted out, the money is gone. In the meantime, if your account is depleted due to unauthorized charges, then any checks you wrote could bounce.

Here is a real-life story that provides a good example of this important feature. A woman bought furniture from a business in another state. She was smart and used her credit card. Several weeks passed and the furniture had not arrived. She called the store and learned that the business had filed for bankruptcy. Since she used her credit card and never received the furniture, she disputed the charge and it was removed from her account.

Had she paid by check, she would have had to file a claim as a general creditor and would have had to wait for a refund of her money. Depending on the bankruptcy laws of the other state, she may have waited a long time and only received a part of what she paid.

Credit History: Responsible use of credit cards is one of the most effective ways to build a good credit record. Consumers who don't have any credit cards have an average credit score that is lower than those who have at least one card who carry a monthly balance, according to Credit Karma. Many folks will need credit when it comes time to buy a house or a car.

Convenience: Also, it can be difficult to rent a car without a credit card. Some hotels may not book a reservation without a credit card, and those that do often place a "hold" of several hundred dollars, which freezes that money in your bank account, making your available balance lower, which can cause incoming checks to bounce.

Benefits and Rewards: Finally, there are the additional befits and rewards programs that come with credit cards, which include frequent flyer miles, gift card rewards, college savings and other programs. Some credit cards provide favorable rates on foreign currency conversions, so these are a good option to use when traveling. Many credit cards also double the manufacturer's warranty when the item is purchased on the card, making credit cards a good payment option when buying and shipping consumer electronics.

Despite all these arguments in favor of credit, if you get into credit card debt and then carry a large balance, the fees and interest you incur will almost always outweigh the benefits.

  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.