You hear a lot about the evils of credit cards these days, and the conventional wisdom around holiday shopping insists that paying with cash is always the best option.
That conventional wisdom is wrong.
Well, perhaps it’s not 100% wrong, but it’s vastly oversimplified and overhyped. The stone cold truth about credit cards is that if you’re a financially disciplined shopper with enough cash to cover your holiday purchases, then you’re actually much better off to put those purchases on a credit card - and then use the cash to pay off the cards.
Here’s why the extra steps are worth it.
Back in 2006, I bought a fancy television. Of course, it broke when it was less than a year out of the one year warranty. Then I remembered that I had put the TV purchase on my American Express, and that meant it was eligible for extended warranty protection.
All major credit cards provide some degree of warranty protection for items purchased with their cards. The usual benefit is to double the length of a manufacturer’s warranty for up to a max of one year. The finer details, like eligible items and warranties and maximum item price, vary from one card to the next, but those generally only come into play on very expensive items or items most people would not normally charge to a credit card, like boats and cars.
In the end, American Express reimbursed me for the full purchase price from two years earlier, just over $2,000. By then, similar TVs were available for much less, and in the end I replaced my TV and pocketed nearly $1,000.
Had I paid cash for that TV, I would have been entirely out of luck.
Price Drop Protection
How many times have you thought you were getting a great deal on something only to see it on sale a week later? You can’t return an item after a certain number of days have elapsed, or if you’ve already thrown out the packaging and used it. Sometimes returns are explicitly not allowed. If you’re lucky, the store you purchased it from might agree to a price adjustment, but you generally will find yourself stuck.
However, if you charged that purchase, you may be able to get a price adjustment through your credit card.
Discover offers price protection with a maximum refund of up to $500 if a lower price is published within 90 days of your purchase. For Citi cardholders, there’s Price Rewind with a maximum reimbursement of $250 when the difference is at least $25 and published within 30 days. And Mastercard refunds up to $250 per claim within 60 days. Exclusions and other conditions vary from one card to the next.
One of the best uses I’ve ever seen of this benefit was when a member of my team used Citi Price Rewind to snag an iPad that we knew would be marked down for Black Friday last year. The ads are available well ahead of the sale, so all he had to do was buy it early inside that 30 day window and file a claim with Citi.
I’m a big advocate of traveling on reward points, and I’ve taken some pretty incredible vacations spending hotel points and air miles. Even if you’re not a hard core travel hacker, it’s silly not to think of holiday spending as a golden opportunity to pocket a bunch of extra points. According to the National Retail Federation, the average shopper spent $730 on holiday purchases like gifts, food and decorations. Using a Chase Freedom today for online holiday shopping, department stores, and at Amazon would earn 5x cash back totaling as much as $36.50. Whatever rewards card you prefer, holiday shopping is an opportunity. Take advantage of it.
I’m not advocating going into debt, and these cardholder benefits are really only worth something if you’re paying the cards off in total right away. But my point stands - if you have the ability to pay cash for a holiday gift, then paying with a credit card generally offers a much better deal.