The Pros and Cons of Having a Credit Card
Chances are you either have a credit card (perhaps you even have several) or that you have had one at some point in your life. Credit card ownership is extremely common, since the cards provide a great way to build credit, but can also be extremely useful in case of financial emergencies.
However, credit cards can also come with a high price tag, most obviously in terms of the high interest rates they charge for late payments. As with all things, there are definite advantages and disadvantages to credit card ownership.
Before you consider taking out a credit card, read over the following pros and cons so that you can make the best financial decision possible:
Advantages of Credit Cards:
Builds a Credit History
In order to buy a house or even a car, you usually need to have a credit history. Credit cards are one of the simplest ways to achieve this. Having a credit card that you pay off regularly allows you to build a great credit score and a solid credit history. This will make taking out a mortgage, a loan to buy a car or renting a property much more easily achievable.
Less Hassle than a Conventional Bank Loan
Using your credit card is essentially the same thing as taking out a loan. As a borrower, you are using ‘credit’ to make purchases and payments which you will have to repay later on. The main advantage of using a credit card instead of a conventional loan is that it can be used for every day purchases and financial activities, and that you don’t have to continue reapplying for credit each time that you need more of it, like you would with a traditional loan. Regular loans can take weeks to be approved and generally involve a huge amount of paperwork, whereas credit cards can often be used on the same day of activation. Credit cards are more efficient, easier, and faster than traditional loans, though they aren’t necessarily used for the same types of financial transactions either.
Great for Covering Emergencies
All of us have to deal with expensive emergencies at one time or another, whether they come in the form of unexpected car maintenance or medical problems. The best way to prepare for such emergencies is to create a financial safety net, and having a credit card is perhaps one of the most straight forward ways that you can protect yourself from these types of financial pitfalls. Although you will have to pay off your credit charges eventually, using it for emergencies will allow you to preserve your savings and give you the chance to pay off your debt gradually rather than having to pay for everything up front (which many people simply can’t afford to do).
Access to Valuable Rewards
Most credit card companies provide some kind of reward scheme that their customers can sign up to participate in. The more that is spent on the credit card, the more rewards are granted. Typically these rewards include restaurant certificates, travel discounts, concert tickets, airline miles or other benefits. One of the many bonuses of having a credit card, reward points can help you save money on your next night out or major vacation.
Better Protection Against Fraud
As a credit card owner, you will have much better legal protection against fraud than you would get from a simple debit card. It can be difficult to legally establish stolen money from checking accounts, whereas with credit cards it is much easier to track down and find the culprits. This makes dealing with identity theft and banking fraud a lot simpler. When something happens to your credit card, you are virtually guaranteed to have the issue resolved and your credit balance restored. On the whole, credit card banking can be a lot safer method than solely relying on your checking and savings accounts.
Disadvantages of Credit Cards:
Credit Card Interest Rates
Credit card companies make enormous profits by lending to customers who are not able to make their monthly repayment, and who then are forced to pay extremely high interest rates. Although interest rates can start off small, the longer you fail to repay your credit card balance off, the higher the interest charges will gather. Interest compounds as well, creating more debt for you by the day, so unless you’re careful about it, you could find yourself quickly facing a staggering debt. One of the biggest disadvantages of having credit card debt is that the interest rates can leave you in the red if you’re not very careful from day one.
Risking Your Credit Score Rating
Although you need to use credit to establish a credit history that will allow you access to bigger loans for larger purchases, you also risk damaging your credit score when taking out a credit card. Keep in mind that poor credit can sometimes be even worse than no credit at all. A good credit score rating is very important for buying property, taking out a lease and sometimes even getting a job. Taking out a credit card which you don’t manage properly can get your credit score quickly crushed, so be sure that you avoid missing payments or you could significantly harm your long-term ability to qualify for larger loans.
Promoting Irresponsible Spending
In many ways, credit cards promote unhealthy and irresponsible spending. Many credit card users make the mistake of relying too heavily on their card and ignoring the fact that they need to make regular repayments to avoid a damaged credit score and huge interest rates. Credit card debt can lead to bankruptcy and has unfortunately led many Americans to lose everything, especially since the recession began. A credit card should ideally only be used for items that the borrower knows they will be able to repay, but many card users over spend, driving themselves into debt that they can’t possibly get out from under.
Hidden Penalty Fees
Very few credit card users read the fine print when they take out a card, and are in turn often surprised when they are hit by ‘unexpected’ fees. Credit card companies are notorious for charging fees for virtually anything and everything that you could possibly do, and for charging unexpected penalty fees for late payments. Credit card companies make the vast majority of their money by charging high interest rates, but they also do quite a bit of business on fees and other penalties that most credit card owners never thought they’d have to pay. Receiving an unexpected charge can be a nasty, expensive shock, but sometimes the credit card user’s only option is to pay it off and move on.
Increased Chance of Identity Theft
It’s true that you are well protected by your credit card company if credit card fraud or identity theft is committed against you, but this is only because there is such a high chance of it occurring. These criminal acts are relatively common occurrences for credit card users, and although you will more than likely be protected from it should it occur, that doesn’t mean it isn’t a huge hassle and inconvenience. Identity theft can involve losses of tens of thousands of dollars which sometimes takes months to rectify, leaving you in a tight position during the meantime. A definite disadvantage to owning a credit card, this is often one of the central reasons people use to not have one.
Summary Thoughts
Ultimately, it’s up to you whether or not you take out and use a credit card. Remember that they come with advantages and disadvantages, some so damaging that they could lead to complete financial ruin. Before taking out a credit card of your own, make sure to consider the pros and cons, and if you do take one out, please use it with caution.
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