Weighing the Pros and Cons of Credit Cards

Pros and cons of credit cardsRegardless of whether they currently own a credit card, 25% of Millennials describe credit cards as something that worsen their financial standing. On top of that, they are much more likely than Gen Xers or Baby Boomers to feel this way. Another 30% of Millennials say that they are not sure how credit cards could be helpful. When we read these statistics, we knew we needed to help!

The use of credit cards has become so widespread that we make practically all our payments with plastic according to a study by ACCC. That being said, before you apply for your first credit card, it’s important to weigh the advantages and disadvantages of paying with plastic. It’s important to do you research on things like fees and interest rates. It’s not unheard of to see interest rates slowly but surely increase each year, which can make paying off the debt nearly impossible. Below, we’re breaking down the pros and the cons of diving into the world of credit.

Advantages of Credit Cards

  • Credit cards are accepted nearly everywhere. There are even some places where you must pay with a credit card, such as when you want to rent a car. Many companies will ask you to pay with a credit card precisely because thanks to the credit they make sure that even if you don’t have funds in your account they will be able to charge you. Similarly, if you travel abroad, it’s easier to accept your plastic when you are on credit than when you are debiting.
  • Has your hard drive crashed and you need to get a new laptop ASAP? Do you need to book travel for work but won’t get reimbursed right away? Having a credit card can be a great help in case of emergencies or when you need to make an urgent purchase for which you don’t have cash on hand. Life throws financial curve balls all the time, and sometimes (not always!) a credit card is the best way to get you through them.
  • One word: rewards. Who doesn’t want to get a little something extra on the purchases you make? Most credit cards have programs where you earn points for each purchase you make. These points can really come in handy – whether it’s for fun things like travel, hotels or restaurants, or for the inevitable less fun purchases like when you need to buy a new vacuum cleaner but don’t want to use your hard-earned paycheck for something so boring! Be sure to do your research before picking a credit card to make sure you understand the fine print when it comes to rewards, and look for special sign-on bonus offers.
  • Building a credit history is absolutely essential to almost everything you may want to do in the future; renting an apartment, getting a cell phone, buying a home or car, taking out a student loan and sometimes even getting a job. Your credit score matters, and despite what many people may think, credit cards can be a great way to build up that score. Think of your credit score as your financial reputation; it signals to people how responsible you are with money. It determines everything from how much interest you will pay, how much you’ll pay in home or auto insurance and can even affect whether or not you can even get a cell phone. By opening a credit card, using it responsibly, paying your bill in full each month and maintaining a low debt-to-credit limit ratio, you’re building your reputation as a trustworthy adult.
  • Many credit cards offer insurance on things like vacations that can come in very handy when plans don’t go as expected. Additionally, some credit cards offer something called purchase protection, which means you’re covered it something you purchase on your card gets damaged, stolen or lost.

Disadvantages of Credit Cards

  • Pros and cons of credit cardsIt is very easy to end up accruing debt when using a credit card if you’re not careful. While they are an easy fix to something like a crashed hard drive, it’s imperative to remember it’s REAL money you are spending. While credit cards offer you the option to pay a minimum payment each month, you will pay interest on whatever balance is left (called a finance charge). That interest can increase over time, and lead to paying much more for the item than you initially intended.
  • Fees! You may be able to purchase things and pay them off over time with a credit card, but keep in mind that you will be paying for that benefit. Almost every single credit card has various fees associated with them – whether it’s a late fee, a monthly or annual fee, over-limit fee, balance transfer fees or foreign transaction fees. Be sure you know what you’re being charged extra for so that there aren’t any surprises in your monthly bill.
  • We’ve discussed how credit cards can help boost your credit score, but they can just as easily lower your it if you don’t play by the rules. Even missing one payment can have a negative effect on your score. Likewise, carrying a high balance is another sure way to lower it. Be prepared to pay on time each month to avoid getting a ding on your credit report, and be sure before you a make a purchase that you’ll be able to pay over the minimum each month.
  • With cash, it’s easy to tell how much you’ve spent and how much is left. With credit cards, it can be more difficult to keep track of how much you’re spending. Once you’re in the habit of whipping out your credit card, it’s easy to forget that just because you CAN buy something doesn’t mean you are financially able to buy it. Keep track of all your credit card purchases and ensure they’re within your budget.

Simple Credit Card Best Practices

  • Look for cards with low-interest rates: there are cards on the market that offer moderately low interest rates.
  • Pay off the full monthly balance so as not to generate interest. If you can’t pay in full, pay as much as you can and avoid covering only the minimum payment.
  • Do not spend more than you can afford; make a monthly budget and stick to it just as you would with cash or debit.
  • Never reach more than 95% of your available balance on the card (try not to even go this high!). The higher your debt-to-credit ratio, the worse your credit score.
  • Do not miss a payment. If you’re struggling to pay, at least pay the minimum amount. In fact, it’s best to schedule automatic payments through your checking account to ensure you never miss a due date.
  • Do not make cash advances – they tend to have a very high charge associated with them.
  • Never allow others to use your card. You are responsible for all charges on your card. Do not let others borrow it.
  • Track the use of the card and compare your records with the information that appears on the monthly statement.
  • Do not necessarily cancel a credit card once it’s paid in full or you’ve decided you no longer want to use it. By having a line of credit available without any debt, you are increasing your debt-to-credit limit ratio, thus increasing your credit score.