At first glance, credit cards seem pretty simple - you just swipe the card and you're done. However, there are a a lot of pros and cons to using them.
First, we should talk about what credit cards are. Credit cards allow people to borrow money to buy goods and services, with the key condition that the money will be paid back at a later date. Payments are typically made monthly. If the payments are not made in full by the due date, interest rates can apply. These interest rates can be as high as 30 percent, depending on the credit card issuer.
Now, let's get into some of the pros and cons of using a credit card:
Pros:
You can build your credit score.
If you are making your payments on time and in full (not accruing interest), then you can increase your credit score. This is beneficial because you can qualify for better cards with more rewards and it helps when trying to get approved for loans as companies take your credit score into account.
It is more convenient to carry a credit card than cash.
Rather than carrying loads of cash and having to calculate if you have enough, credit cards are easier to carry and make your wallet lighter.
You can earn rewards if you're using a card that offers them.
Some credit cards offer rewards in the form of cash-back or travel rewards. When comparing credit cards, you can look at the different rewards that companies offer and see which fits your lifestyle.
You have fraud protection and security if your card is stolen or lost.
As opposed to using cash, if you lose your credit card or it gets stolen, you can use its security features to ensure that no one gets access to your money. As soon as you find out that your card is lost/stolen, be sure to call your credit card issuer to change your card and number.
You have more time to pay off your balance.
With set payment due dates and grace periods, you have more time to make your payments and also ensure that there are no mistakes in your payment history. It can be helpful to track your spending habits and monitor charges in your account to ensure there is no fraud. If there are discrepancies, be sure to call your credit card issuer and report these charges.
Cons:
It can be easy to overspend.
Sometimes, with credit cards, it seems as though you are spending someone else's money as you do not have to make payments until later on. This makes it easier to overspend and go beyond your means. It is important to remember that you must make payments at some point, so treat credit cards like cash. Spending too close to, or over, your credit limit can damage your credit score or cause your card to be declined.
Interest can accumulate quickly, and cause debt.
If you are not making your payments in full, you might have to pay interest rates on the remaining unpaid balance. These interest rates can be as high as 30 percent. This can result in a cycle of debt, as payments pile on and continue to accumulate interest.
It can damage your credit score, making it more difficult to take out loans.
Spending too close to your credit limit, accumulating interest, and making late payments are some of the things that can cause your credit score to decrease. This can make it more difficult to take out loans or qualify for certain credit cards or card benefits.
You may be subject to late fees.
If you make late payments, you may have to pay a late fee. This can also damage your credit score or cause your interest rate to increase, depending on the credit card issuer's rules.
When choosing a credit card, it is important to keep these facts in mind. Be sure to read all of the issuer's rules and try your best to make your payments in full and on time.
Remember, the best policy is to treat credit cards like cash!
Definitions:
Click the word to see the full definition on investopedia.com.
Credit Score: "A credit score is a number between 300–850 that depicts a consumer's creditworthiness. The higher the score, the better a borrower looks to potential lenders."
Grace Period: "Number of days between a consumer’s credit card statement date and payment due date when interest does not accrue."
Credit Card Interest: "Interest is what credit card companies charge you for the privilege of borrowing money. It is typically expressed as an annual percentage rate, or APR."
References/Links:
For more information on credit cards, check out these links:
If you could not tell from my previous links, investopedia.com is my go-to website for all things finance! They have amazing, easy-to-read articles on practically anything you want to know. They even have a stock stimulator on their website if you want to play around with investing fake money!
Master Your Credit (thebalance.com) - Includes good definitions related to credit cards