Many people use credit cards every day. They account for 21% of spending according to research done in 2015 by the Federal Reserve Bank of San Francisco. There are some amazing benefits to using credit cards, but there are also an equal number of unfortunate downsides. We are going to help you sort through the pros and cons of using credit cards. When you have finished reading the article, you will be able to make an informed decision on whether or not a credit card is right for you.
First, we will start with the benefits of using a credit card. The best thing about a credit card is that it can protect you. In the unfortunate event your card is lost or stolen, you aren’t liable for any unauthorized charges and therefore aren’t out any money. The same would not be true of your debit card.
Another benefit of using credit cards are the reward programs. Many cards come with perks like cash back or airline miles that can be redeemed down the road. These points and rewards can really add up, especially if you use your credit card for everyday purchases.
Let’s move on to the drawbacks of using a credit card. Most credit cards have significant interest rates, and some companies can have rates that exceed 20%! For example, the average APR on a new credit card offer is roughly 19%, according to WalletHub’s latest Credit Card Landscape Report. If you are carrying a balance on your credit card, you could be paying large amounts of interest that would make anything you buy with your credit card even more expensive.
The next drawback of using a credit card is that it is easier to overspend. When you pay for things with your debit card, it is easy to think of it as an equivalent to cash. The money is coming directly out of your checking account. With a credit card, the cash isn’t coming from your personal account, so it may be easier to justify a big purchase. Some people also make the mistake of viewing their credit cards as supplemental forms of income, which leads them to shopping based on their desires rather than necessities.
Finally, we would like to offer one more note on credit cards. This one could either be a positive or a negative. Credit card companies relay account information to the major credit bureaus on a monthly basis, and this affects your score. If you pay off your balance each month, and you keep your credit usage low, using a credit card can boost your score. If the information reported to the credit bureau is negative, including missed payments and high credit utilization, for example – your credit score will suffer. Credit score damage will make it harder to get good rates on future loans.
As with most things in life, credit cards have both positive and negative characteristics to them. When used wisely, they can help build credit, protect you against identity theft, and help you earn rewards for everyday spending. If you have a question about credit cards or whether using one would benefit you, please give us a call. We would be happy to help. Thank you for reading!