5 Benefits and Pitfalls of Credit Cards

Credit cards in and of themselves are not bad. As with anything it’s what you do with them that determines whether it is good or bad. Here are 5 advantages and disadvantages of credit cards.

Pros
1. Cash back bonuses, zero percent interest & rewards – this is an excellent perk only if you pay your credit cards off every month or within the time frame designated on the promotion. You can rack up free airline tickets, gift cards, electronics and cold hard cash all for buying what you were going purchase anyway.

2. Convenience – Every time I carry a large amount of cash I feel like I’m a magnet for a thief. I somehow feel they can tell I have cash on me. Credit cards are convenient and if stolen, unlike cash, you can cancel the card and will not be held liable for unauthorized purchase. With cash, if it’s stolen or you lose it, it gone for good.

3. Reservations – If you need to make a reservation at a hotel or need to secure a rental car, most will not take a debit card or cash to hold a reservation.

4. Emergencies – Sometimes life happens and even the best laid plans often cost more than what we have in the emergency fund. For those true emergency situations a generous line of credit can make all the difference.

5. Rental car insurance – I found out about this little perk by accident. Literally. I rented a rental car for the weekend and decided to decline the insurance they offered. Less than 10 hours later I dented and scraped the car door on a parking lot pole. I called the rental car company and told them what happened and the agent said that most credit cards offer coverage for rental cars but I had to pay the deductible upfront and it would be refunded to me by my credit card company. Sure enough they paid for the whole thing. Now according to www.creditcards.com this provision varies from card to card, so make sure to call your credit card holder for their policy regarding rental car insurance, before declining coverage.

Cons
1. Convenience checks & cash advances – With a good credit score I have become the recipient of a daily credit card application. Read the fine print. If you happen to write the check for more than what is available on your credit line you can find yourself with an over the limit charge and higher interest rate. Also, these checks cannot be used on cards owned by the same company.

2. Balance Transfers – The zero percent teaser rate looks good especially if you are currently paying 20% on your current card. Make sure you do the math before making the transfer. For instance most balance transfer offers will want a transaction fee of $5 or 3% of the amount of each transfer. This may vary from card to card, but make sure you are an informed consumer and know the guidelines for your card. Also, make sure the balance is paid before the offer expires. If you don’t you could be in for an unpleasant surprise – a significant increase in your interest rate. Also with balance transfers you cannot go over the limit, or have a late payment.

3. Variable and fixed interest rates – Check to make sure you have a fixed rate credit card and not a variable rate. Variable rates change monthly and the interest accrued on those cards can quickly rack up.

4. You tend to spend more when using credit than when you use cash – Because you don’t feel the physical pain or see the actual dollars leave your hand. This one degree of separation and the mindset of buy now, pay later can lead to you spending more than you would if you paid with cash.

5.Too many credit cards can negatively affect your credit score – It’s so tempting to open that department store credit card to get the extra 10% off, but too many credit cards or applications can have a negative impact on your credit score.

Credit can be your friend, if used wisely. Make the most of the benefits.

Source: personal experience, credit card applications, www.creditcards.com