Nothing brings out more mixed emotions than the credit card. Various financial writers feel that credit cards are pure evil. They will give you countless of examples of people who abused credit cards and ended up in financial ruin. Other experts will mention the many benefits that credit cards offer. You might get the impression that they are an essential tool for any responsible user.
Lenders and retailers make it so easy to obtain them, and then offer you discounts and coupons to keep using it. You can earn cash back and air miles to apply toward travel and vacations. It can be a very difficult decision for many people in deciding who is right.
I like to compare credit cards to a tool like a hammer. They can be incredibly handy and useful in the right situation and terribly dangerous in the wrong hands. If you use credit cards, you have to maintain a sense of control and responsibility over your spending.
Examine the Pros
Many consider the credit card an essential staple here in the United States, but the truth is that they are not for everyone. There are a lot of pros and cons to think about regarding any type of credit. You need to make sure if you decide to use one that you are the master and always in control of its use. Otherwise, you will find that you quickly become a servant to a very demanding boss. One that will demand regular payments at sky high interest rates. If you make a mistake with a payment, you will get penalized immediately with an expensive fee.
One of the things that makes credit cards so popular is that they are so convenient. It is significantly easier to pull out a credit card and make a quick swipe than to pay cash or write a check. It is nice to be able to pay at the gas pump and order items off the internet quickly. Even going through the local drive-thru fast food place is faster than ever. Credit cards make it quick and easy to pay and go.
One of the tools that credit card companies use to entice people to use their card more often is to provide reward programs. Not all of the programs are created equal. Some of them offer cash back, points that can be redeemed for a variety of merchandise, airline miles, sporting equipment, and even cash back rebates toward your balance.
Another hot topic of debate among many experts is the building of a credit score. This is also known as a FICO score. FICO stands for Fair Issac Corporation and has become the standard credit rating in the United States. Most people want to build a solid credit history in order to borrow money for a future major purchase like a house.
A credit card is often the first building block in establishing a credit history and building a good reputation. If you demonstrate dependability and responsibility, companies will be more inclined to loan you money. The key is keeping up with the payments. Remember what happens if you fall behind or rack up a ton of debt. That will make you the servant and can cause all kinds of headaches.
It is really convenient to buy now and pay later. That can also be considered a con that we will examine later, but being able to buy on credit can be so useful when all you have to do is transfer the money one time a month for a variety of purchases. I strongly recommend never carrying a balance on a credit card. However, I understand there may be times under the right circumstances you may feel it is appropriate to carry a small balance. Just make sure you pay it off as soon as possible and do not let it grow!
Credit cards have excellent fraud protection and carry less risk than debit or ATM cards. With a credit card, you typically will pay no more than $50 for a fraudulent transaction and it does not impact your cash situation the way a debit card would. With a debit card, you could end up fighting to get your money from a bank account affected by the criminal activity. It can be a real mess to your cash flow, ability to pay bills, and peace of mind.
There Are Many Drawbacks
If you are a fan of the credit card, it is really easy to point at all of the pros of using one. However, you really have to pay attention to the negative aspects of credit cards. Misuse will cause a significant amount of damage to your financial bottom line.
One of the biggest cons of a credit card is the requirement to pay back interest. Most credit cards have annual percentage rates (APR) of 10 % and over. If you continue to carry a balance month after month, that $100 bag of groceries can cost you a lot more in the long run. Remember, compound interest cuts both ways.
I cannot emphasize enough that you should do your utmost to pay off the balance on a monthly basis. Some cards offer 0% APR financing for a time period, but be careful using those. The majority of them are actually deferred rate offers. Many people have found out the hard way what the small print at the bottom mentions.
Usually once that introductory rate is over, any balance you carry is based on the full balance amount at the beginning of the offer. Furniture and appliance stores are famous for that tactic – 0% for 36 months! Then if you do not have it paid off in 3 years you get hit with a massive bill for all the back interest payments. I can think immediately of several horror stories of people I know who made that mistake.
Another way that credit card companies rack up quick profits on people who either cannot pay or make a legitimate mistake. If you miss a payment, there is often a $25 or higher penalty fee added to your account. As a repeat offender, those can add up quick and signify a very dangerous problem. If you cannot afford a payment then it becomes a vicious circle that can spiral into massive amounts of debt. If you receive a penalty with a late fee, that is one too many.
Imagine you are sitting at lunch with a friend and they pull out their shiny titanium exclusive personal rewards card. You might feel pretty small paying cash or using your plain old credit union card with the low interest rate. That’s all Marketing 101 used by the credit card companies. People want to feel part of an exclusive club. The higher the level of card, the appearance of an increase in wealth and prestige! Peer pressure can be very powerful.
The only true sign of wealth is your net worth, not which credit card you carry in your wallet. That shiny titanium card probably comes with a nice annual fee, a super high interest rate, and a credit limit that could do a significant amount of damage in the wrong hands.
Like I mentioned, some of them do have nice rewards programs. Those rewards are only valuable if you avoid excess fees and interest payments.
People may indicate that it is a sign of adulthood and that everyone should have the highest level card possible. That is not true. They are not right for everyone and it is an important personal decision on whether you get one or not. I would rather be in the more exclusive debt free club than have a nice looking piece of plastic in my wallet.
Ease of Spending
Just like convenience of use is extremely handy, the ability to spend a lot of money in minutes can do some major damage. It is very easy to become detached from a credit card purchase because you are not actually watching the money leave your wallet. Making that quick swipe seems so easy and harmless!
Once again, if you are not extremely careful it can quickly lead to suffocating debt. If you do not have the cash on hand to back the charge and pay it off, you need to consider the consequences. How vital is the purchase you are about to make to your livelihood?
Destroy Credit Score
You know that credit score you worked hard to build and maintain to prove you are credit worthy? It can go quickly into a death spiral if you abuse your credit cards. If you start missing payments and get hit with late fees, your score will suffer. Even having too many open credit accounts can sink your score like a brick to the bottom of the ocean.
Analyze Your Spending Data
With all of the differences of opinion out there regarding credit cards, it can be tough to decide on which path to take. Many people who are firmly against the use of cards site studies that indicate people spend more money when they use a credit card as opposed to using cash for a transaction. The studies indicate that it has more impact psychologically to hand over cash than it does to simply swipe a card.
Some retailers have indicated through data provided that the average transaction for credit card purchases is higher than those in which cash is used. Another study may indicate that there is absolutely no correlation between credit and increased spending. Once again, there is no standard answer.
I recommend using the data you have accumulated to see how your spending patterns look. I found that since I started recording each and every financial transaction and keeping a monthly budget, I have a strong aversion to any type of overspending. It is another reason I cannot urge you enough to record your finances and set some budgetary goals.
Accountability Keeps Credit Card Spending in Check
Accountability is the biggest weapon against the misuse of credit cards. If you notice patterns where you walked into a store intending to spend $100 and you came out with a $200 receipt, you need to examine what happened. It is easy after a few drinks out with the gang to get very generous and decide to pick up the tab for the evening. What you intended to be a $30 night on the town turns out to be a $200 nightmare.
You probably get barraged with daily emails from companies you have ordered from online. There are going to be all kinds of special, one time only sales that will attempt to lure you in. Just because it is on sale does not mean it is a good idea to purchase something!
Believe me, there will be plenty of sales when you have the money and are in need of an item. If you find that your handy credit card is like a hand grenade to your budget, you need to seriously examine if you should use one or not.