When used right, credit cards can help you to feel empowered and secure in your financial health and improve your quality of life. When used improperly, however, they can cause you more problems than not having them at all.
Learn the pros and cons of credit cards, so you can better decide whether or not they’re right for you.
This will also help you understand how to use credit cards responsibly and avoid the dangers of not doing so.
There are many benefits to having a credit card, including convenience, security, rewards, and good credit.
Anytime you need to pay for something, you can quickly pull your credit card out of your wallet and be done with it.
There’s no counting cash (or even remembering to carry enough of it) or digging around in your pocket or purse for change.
There’s no carrying around checks (or even remembering to order them) and filling them out, then filling out their register and reconciling it with your statement each month. Nor do you need to worry whether there’s enough money in your bank account to cover them.
If you’re shopping online, you can even have the shops you frequent store your credit card information securely on their systems, so you can select it in future purchases without needing to enter in all your information again.
And, if you're splitting a check with others, there’s no easier way than handing the clerk a credit card and asking him or her to split it for you.
Sometimes you need something now, but you can’t afford to pay for it in full all at once. Credit cards offer a way around that.
With a credit card, you can buy a high-priced item now and pay for it in smaller chunks over time.
Credit cards are much more secure than cash. If your cash is stolen or lost, you’re out of luck, but if your credit card is stolen or lost, you can report it to the issuer and have it frozen and replaced.
Credit cards also offer consumer protection from such dangers as fraud and identity theft.
If you don’t recognize a charge on your credit card bill, you can always dispute it. Most credit card issuers won’t hold you liable for unauthorized purchases made with your card.
Many credit card issuers even offer monitoring services to watch out for suspicious activity, such as spending that’s inconsistent with your normal behavior, and report it to you the moment they notice it.
Some credit cards offer introductory 0% interest rates for a set period of time. This means you can make purchases and transfer balances from other credit cards and loans to pay off with no interest charges over that time.
Transferring balances to a 0% credit card can give you a break from accruing interest on top of your debt.
Certain retailers will sometimes let you make purchases on their store credit card at no interest as long as you pay it off in full by a certain date.
NOTE: if you don’t, you could be forced to pay all the interest you would have accrued over that time at the card’s normal APR.
Many credit cards offer rewards programs based on your use. The more you use a certain rewards card to make purchases, the bigger the rewards you earn.
Some credit cards, for example, offer travel perks. With these cards, you can earn airline miles or discounted hotel bookings, or car rentals. Some also offer extra benefits such as:
Other credit cards offer cash back on purchases. You can, then, redeem this cash into your bank account or have it automatically applied to paying down your credit card balance.
Even when a credit card issuer charges an annual fee for a rewards card, as long as you use the card enough, the rewards can far outweigh its annual cost.
Just be aware that rewards will never outpace accruing interest if you carry a balance on your rewards credit card. To get the real value out of a rewards card, you need to pay off the balance in full each statement period.
You can often book reservations, such as for hotels or car rentals–using a credit card without the card even being charged.
In contrast, if you use a debit card instead to book a reservation, a hold may be placed on all or a portion of the amount to be charged, preventing you from access to that money before you even need it to pay the charge.
In some cases, that hold could be for the full amount plus an additional amount to cover incidental charges.
We referred earlier to how inconvenient it can be to keep records when you use checks, maintaining a register and reconciling it with your statement each month. Keeping records of cash expenditures is even harder.
With credit cards, all the recordkeeping is done for you. You can access it whenever you need it, such as to verify a charge or file your taxes or to help you figure out what types and amounts of insurance you may need.
One of the biggest reasons to have at least one credit card in your name is that it can help you to build credit that you can later use to improve your quality of life. That is, as long as you use it responsibly.
A credit card helps you build and track a credit history. This is a record of your experience borrowing money and paying it back.
Every time you open a new card, the issuer reports your activity with that card to one or more credit-reporting bureaus. If you miss a payment or are late with a payment, the issuer reports that as well.
But, if you keep your balances low and make at least your minimum payments on time, you can build an impressive track record and a high credit score.
The factors that help determine your credit score include:
Lenders use this information–namely, your credit history, or credit report, and your credit score–to determine whether or not to lend you money.
By demonstrating such a pattern of responsible credit card use over time, you can then help qualify yourself for a loan, such as a car loan or home loan. Or, you can qualify for a cheaper rate on a car or home loan or, even, a better, larger, or more expensive car or home.
In contrast, using debit cards, checks, and cash will not help you build credit.
Again, irresponsible credit card use–such as missing payments, making late payments or carrying high balances–can damage your credit.
Watch out before you get a credit card or go out using one, however. There are many lurking dangers of credit cards, including:
Poor credit can, then, negatively impact your overall financial health.
Credit cards make it easy to live above your means, which is not as pleasant or desirable as it sounds.
Instead of being limited as to how much you can spend based on how much cash you have in your wallet or bank account, you can spend up to your (typically much larger) credit limit.
Then, if you can only afford to make minimum payments, you’ll pay mostly interest on those purchases, keeping you in a self-feeding cycle of debt.
When you live a more luxurious life than you can afford and simply put off concerns about how to pay for it until later, the costs of that extravagance can quickly add up.
Just because you get to pay for something incrementally over time doesn’t mean you don’t still have to pay for it eventually. And, if you keep up this pattern, you eventually won’t be able to break it.
The key to safe and responsible credit card use is discipline. Don’t spend more than you earn.
You can use your credit cards to buy you a little time to pay for a purchase. But, don’t use them to make purchases you can’t even afford to pay for in time.
Picking up from the last point, when you overspend and underpay, you can quickly and easily dig yourself into a hole of debt.
And, the deeper that hole gets, the harder it is to climb out of it.
If you’re going to borrow money, credit cards are not the cheapest way to do so.
Credit card interest rates are typically much higher than interest rates on personal loans, especially compared with a loan you get from a bank or credit union with which you already have an established history of responsible personal money management.
Credit cards also charge a bevy of fees, including:
These can all add up fast.
Even if you manage to avoid these fees, if you don’t pay your credit card balances off in full each month, the interest on the unpaid portion is added to your future balance. Then, when interest is charged moving forward, it’s calculated according to this new, larger balance.
And, while credit cards may allow you to get cash advances, they also tend to come with an even higher interest rate than that for regular purchases.
As much as credit cards can potentially help you build credit, they can also damage your credit.
If you apply for too many credit cards, it can actually make your credit score go down.
Every time a credit card company checks your credit to decide whether or not to give you a credit card, it gets recorded. If your credit is checked too often, it can lower your credit score.
Not only will future potential lenders consider your credit score when deciding whether and how much to lend to you, but they may note with suspicion how many times you’ve applied for credit recently.
There are many pros and cons of credit cards.
On the plus side: They’re convenient to use, they can help you to improve your quality of life and they often come with perks that make them more rewarding to use than cash or checks.
On the minus side: They can tempt you to live beyond your means, they can make purchases ultimately cost more and, when used improperly, they can make it harder for you to get a loan for a car or home.
To discuss whether getting a credit card is right for you or whether a personal loan might be a better decision or simply for help repairing your credit, give us a call at 904-723-6300 or contact us online at 121 Financial Credit Union.
We'll help you to consider all the advantages and disadvantages of the borrowing opportunities available to you.