A credit card is an essential tool of modern life, but there are also a lot of pros and cons of credit cards. Sure, it is convenient and secure. However, a credit card can also really eat into your wealth and burden you with debts that you might not be able to repay.
Nonetheless, it’s one of the most recognized forms of payment in the world and isn’t going away anytime soon.
For those of you who are responsible with your spending, credit cards are an essential tool in your financial arsenal. But before you jump to getting your first credit card or even your second, it is important to understand both the advantages and disadvantages of credit cards.
In this article, we review ten different pros and cons of credit cards, starting with the pros.
Pros Of Credit Cards
Credit cards have grown to be one of the most recognized forms of payment. With the popularity, there are many advantages of using a credit card. Below, we review ten pros of credit cards.
1. Build Your Credit For Future Purchases (Like A Home Or Car)
One of the biggest advantages of having a credit card is that you can build up your credit. While this might not seem extremely crucial for you right now, it will be when the time comes for you to make a major purchase like a home or a car.
Why is that you might ask?
It is because credit card companies report your usage and payment history to credit bureaus, which impacts your score. If you pay on time and use little amounts of your credit line, you’ll get rave reviews from the credit bureaus.
As a result, this will translate into huge savings for you on interest rates down the road on loans, mortgages, and even future credit cards.
When you build up enough positive history of paying on time, you might even be able to get your rates lowered on your current cards.
2. Makes Life Convenient
It’s hard to overstate this aspect of credit cards. They make your life a lot easier.
Credit cards power the world economy in multiple ways. With credit cards, you are no longer required to carry around cash or cheques and they enable you to buy things online.
As with everything, there’s a price to pay, but the inconvenience of not having a credit card often outweighs that.
3. Rewards Programs For Cashback And More
Rewards programs are great if you pay off your balance at the end of the month and if you are never required to pay fees or interest charges.
There are a variety of different reward programs available. Examples include cashback and points programs for purchasing goods or booking flights and hotels. There is a credit card out there for every type of reward you can imagine.
That’s a big pro and an extra incentive to use credit cards. In fact, it is one of the advantages of credit cards that savvy consumers make sure to integrate into their spending habits.
4. Deferred Payment
Credit cards allow you to make larger purchases. And in some cases, credit card companies allow you to make these big purchases interest and payment free for a certain period.
In that period, you can free up some liquid cash to pay off your large purchase as well as keeping your financial world in order.
While this is usually a feature of the better credit cards out there, it is also common in some entry-level credit cards as well.
5. Identity Theft Protection
Many credit card companies offer free identity theft protection as part of their service.
It is not only a convenient and cheap way to keep your personal details safe but it also gives you some backup and an additional set of eyes looking out for you.
6. Fraud Protection
Similar to how credit card companies want to protect your identity, they also protect you from fraud.
Advances in technology have allowed credit card companies to notify you immediately if a purchase was made that is out of the ordinary from your typical spending habits.
Furthermore, if you have been scammed online or elsewhere, a credit card company is often right there to help you deal with the situation and have your money returned.
7. Hotel And Car Reservations
Many hotels and car rental companies require credit cards for them to take a damage deposit. This lump sum of money is used to cover any damages that occur while you are utilizing the rental car or hotel.
Furthermore, credit cards often have accident insurance and other perks included when renting a car or hotel.
Such perks may include a free upgrade to a more luxurious rental car or access to an executive lounge in a hotel.
8. 0% Interest Offers And Balance Transfers For Loan Consolidation
One of the cheapest, most efficient ways to consolidate a loan or huge bill is to move it to a zero-interest credit card.
Likewise, you can also consolidate all debts on other credit cards to your new card. The advantage here is to be able to reap the rewards of a reduced interest expense every month.
9. Insurance On Travel
Things don’t always go right when you are traveling on vacation or abroad. When that happens, a robust credit card program is your best friend and biggest ally.
In this instance, assuming you have booked your travel with your credit card, credit card companies can help in numerous different ways.
This includes handling charges for flight cancellations, providing coverage for medical assistance in the case of an accident, ambulance fees, diagnostic services, dental surgery, and many more.
10. Near Universal Acceptance Worldwide
Similar to how credit cards make travel and online shopping easier, they also form a common basis for commerce around the world.
As credit cards are so universally accepted, another perk includes more efficient currency conversion at cheaper rates than a bank or exchange agency could do. As a result, this allows for nearly instant funding of any endeavor.
The on-demand nature of credit cards is one of those advances in technology that makes modern life so much easier than the past.
Cons Of Credit Cards
Now you have heard all about the pros of credit cards, but what about the cons? For the next ten points, we will review the flip side and discuss the disadvantages of credit cards and other general points that you should be aware of.
1. Getting Into Debt
Debt is never good for your financial wellbeing. There’s no easier way to put it.
There are some debts that are better than others, but all debt is a net negative on your balance sheet.
Credit cards are some of the most predatory and expensive financial instruments out there. Keep that in mind before signing on the dotted line.
2. Huge Interest Charges
All of the convenience of credit cards comes at a price. That price is noticeable in the interest rates that can range from 19% to 30% annually.
If you are unable to pay off your credit card balance each month, it can quickly add up to a lot of money each year.
3. Monthly Fees Or One-Time Activation Fees
On top of huge interest charges, there are also fees associated with credit cards that leech money away from you.
Examples of credit card fees can include one-time activation fees, monthly membership charges, and late-payment charges. Credit cards are masters of burdening you with tons of fees on top of levying huge interest rates.
4. Fine Print On Agreements
Do you really understand everything about your credit card agreement? For example, are you aware of the fine points about fees, interest charges, and even your rewards programs?
If you answered no to any of these questions, then don’t feel bad. You are in the same boat as the majority of credit card users.
Like any contract, there is always a lot of information hidden in the fine print. Typically, this information is misguiding or appears to be opposite than what you were told from the sales associate that signed you up.
Take the time to read over your credit card contract and be sure to have all your questions answered before signing up.
Remember, at the end of the day, credit card companies are a business. It is in their best interest for you to sign up. However, make sure the credit card you are signing up for meets all of your requirements.
5. Approval Requirements
When you apply for a credit card, you aren’t typically given much information on what criteria is used when approving your application.
Approval requirements can be vague, complex, and often make little sense. It is understood that you require good credit to receive a new card, however, that is the only salient feature of credit approvals.
6. Misuse And Abuse Can Ruin Your Financial Life
Running up huge charges on a credit card and not using them strategically can end up derailing your financial plan and putting your whole world into financial jeopardy.
If you know you currently do not manage your finances well, you should be avoiding credit card spending as much as possible.
7. Deferred Interest Agreements
One way that credit cards get you to sign up is to offer you the ability to make purchases or balance transfers with 0% interest during a certain period of time.
While initially, it may sound great, it can come with quite the price tag if you don’t pay off your balance during the last month of that trial period.
All of the interest that has accrued during the period will be tacked onto your bill immediately if you don’t pay off your balance during the trial period.
As a result, this could quite easily transform an already unmanageable bill into an even more significant cost.
8. It Hurts Your Credit To Close A Card
If you decide you do not want to use a credit card anymore, you might want to be careful about closing it out. Why?
Closing an older credit card may cause your credit history to appear shorter. When it comes to getting approval for a house or car loan, the longer your credit history the better.
This is because it proves you have been able to remain in good credit for an extended period. Furthermore, it shows that you have diligently and consistently paid off your balances for a good amount of time.
You probably never thought that getting rid of a credit card would do anything bad to your score. However, you can see quite a significant drop in your credit score, especially if the card is really old.
Instead of closing a card, look to upgrade or downgrade your credit card to a plan that works best for you.
9. Hurts Your Credit to Use Too Much of Your Limit
Similar to how closing your card hurts your score, using too much of your credit limits can also harm your score.
This is called utilization and having a utilization rate that is really high indicates to lenders that you are spending beyond your means.
You could make all of your payments on time and keep everything else in line, but if you use too much of your limit, you could find your score docked heavily.
It is a balancing act with credit cards and banks want to see someone with a balanced approach to spending.
If you are consistently reaching your limit each month, take a look at your budget and where you can cut costs. Alternatively, it could mean that you can afford your spending habits but need to increase your limit.
If you find yourself in this situation, talk to a financial advisor to see what plan makes the most sense for your financial situation.
10. Overspending On Silly Things
The worst aspect of credit cards is that you will spend more money when using one as opposed to a debit card or straight cash. Why?
When everything is electronic and ephemeral, you do not realize how much you spend on things you generally do not need. The psychological aspect of handing over hard-earned physical cash is not present when all you have to do is tap your plastic card.
It is for this reason that you may spend beyond your means when using a credit card. By the end of the month, you might have racked up quite a significant credit card statement. However, it doesn’t feel like you spent a lot of money because you didn’t physically hand over this cash.
Knowing how you spend your money and what you spend your money on are the two fundamentals of good money management. Be sure to check your credit card statement regularly, so there are no surprises at the end of each month.
The realization that there are 86,400 seconds each day. What are you doing today, so that tomorrow you are a step closer to where you want to be? If not now, then when?
eightysixfourhundred, make them count
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