I’ve written before about how to understand and manage credit cards for maximum benefit. My assumption has always been that most people have a credit card. But if you’re still on the fence of whether a card is right for you, here are some advantages and disadvantages to having a credit card.
Advantages of using a credit card
Safer than cash. If you pay with cash and lose your wallet, there’s a decent chance you will never see that cash again. However, if you lose your credit card, it’s simple to go online or call the credit card company to cancel the card and receive a replacement.
Convenience. Credit is easy, which is a benefit and a detriment. As long as you haven’t reached your credit limit, you can make purchases without having to carry cash. Cards are accepted almost everywhere, both in the US and abroad, and are often the go-to choice when ordering online.
Build credit. One of the primary advantages of using a credit card responsibly is the opportunity to build your credit history. By making regular purchases and paying your bill on time, you can establish a positive credit record, which can be beneficial for loans, rentals, and even job applications.
Interest-free loan. If you pay off your credit card on time and in full, you are essentially receiving an interest free loan from the card issuer. Usually this amounts to 28 to 30 days from the time of the purchase until the card is due (and note – this is from the last purchase of the cycle, so your earlier purchases receive an even longer term with no interest).
Security. Interestingly enough, I received a call from my credit card company this morning about three charges (including one for $0.00) that were made to my account. Credit card fraud departments have become better at proactively recognizing unauthorized charges. And most will offer zero liability if you report a fraudulent charge, as long as you do so within certain time parameters.
Rewards. Many cards offer a percentage back when you make purchases, which can be added to your account in points or miles. My last three Christmas trees have been purchased with card points. Every year it seems they run a sale on gift cards for the hardware store where we buy trees. But you can use the rewards to pay off part or all of your bill, book travel, or even invest for your future.
Extra benefits. Many credit cards provide a longer warranty and purchase protection for items you buy. Travel cards may offer access to airport clubs or free checked bags. Most cards offer some type of rental car insurance, trip insurance, and may even reimburse you for TSA PreCheck to get you through the airport faster.
Emergency line of credit. A credit card can serve as a financial safety net, allowing you to make urgent purchases even if you don’t have the funds at hand.
Disadvantages to using a credit card
Someone who can manage their credit card by paying the balance in full before the due date will most likely have few problems. However, even experienced users need to be mindful of credit card disadvantages.
Overspending. When you read about someone who had $20,000 in debt or had maxed out three credit cards, overspending is often the reason. It can be easy to just say “yes” when you’re using a credit card; reports have shown that the pain of handing over cash is much greater than the pain from tapping your card. Additionally, it’s easy to forget charges. I’ve had numerous occasions where I see a charge and I’m convinced I never made that purchase, only to find the receipt in my drawer.
Not only will you end up paying interest if you overspend and can’t pay off your balance in full, but you will also lose the interest-free portion of the loan. Once you make a minimum payment or miss a payment, every purchase thereafter begins accumulating interest immediately.
Interest rates. Credit cards typically have high interest rates. With the recent increase in rates to battle inflation, credit card rates marched upward as well, often settling at 29% or higher. If you don’t pay your balance in full, you will be charged these high rates.
Fees. Credit cards come with a range of fees. You may be paying an annual fee just to have the card. If you travel overseas, you could be paying a 3% charge on every transaction. If you are late with a payment, you will be charged a late-payment fee. If you spend more than your credit limit, you may pay yet another fee. Want to pull cash from the ATM? You will pay a cash advance fee (usually 3% or $10) and most card issuers will immediately start charging you interest on the advance.
Long-term debt. When you are short of money, it’s easy to rationalize using a credit card for groceries or to pay for gas for the car. I’ll pay it off next month, you think. Then you have a flat tire or some other setback that gets charged. Add in interest charges, and pretty soon you may find yourself with little hope of paying off the card.
Lower credit score. Just as responsible management of your credit can build your score, irresponsible use can quickly damage it. Missing even just one payment can impact your credit score. Applying for several cards at once will also lower your score. But something many people don’t know: credit utilization – how much you spend per month compared to how much your credit limit is – can also affect your score. You can pay off your bill in full, yet if you are spending 90% of your available credit limit, your score may be lower than someone who spends only 10% of their available credit.
A credit card is right for me
If you decide to apply for a card, make sure that your credit report is accurate and your score is in the acceptable range for the card (many websites will include the credit score needed for card approval when they compare card offerings). And once you receive the card, challenge yourself to pay the balance in full and on time, and stay below your credit limit (keep your spending to 30% or less of your credit limit). If this is your first card, take the time to read the terms and conditions so you understand the ins and outs of the card. Finally, save your receipts to check against the bill, and make a habit of doing this monthly.
Photo by Energepic