Credit is a necessary evil, and credit cards are the blessing and the curse associated with the necessity of building and establishing credit. In some ways credit cards can help you improve your financial well being, in other ways credit cards can set you up for major financial failure.
While many financial gurus warn you to stay away from credit cards, there are some very sound reasons to own and use a credit card. We’ll look at both the pros and cons of using credit cards as part of your financial lifestyle.
Pros of Having and Using Credit Cards
It takes credit to build credit.
We’ve said the credit is a necessity and it is. If you ever want to buy a house, own a car that isn’t a beater, or run your own business you are going to have to have to have credit. One way to prove that you are credit worthy is to obtain and use one credit card. Pay off the balance from month to month to build your credit and don’t let the charges and finance charges run away with you. In order to use a credit card to establish credit you have to carefully manage the use and payment of the card.
Owning a credit card will enable you to lower your balance to credit limit ratio, which results in improved credit. If you are paying off a credit card consistently from month to month it is easy to get a credit limit increase ever so often. The trick is not to use the limit increase to buy more stuff, but hold the increased credit limit to lower your credit to limit ratio. You can’t use this strategy without a credit card.
Once you have established credit using a credit card can help you learn and exercise financial discipline. Cutting up your credit cards doesn’t require growth and discipline, all it requires is a pair of scissors and blind obedience to someone who tells you that you can’t handle credit. Use a single credit card to practice financial discipline and self control. Only use the card for necessities. You’ll find that it helps you learn the distinction between needs and wants.
It is also important to have a credit card in the event of a major emergency in which funds are needed. Most often people think of medical emergencies in which a co-pay has to be met, but this can also include auto accidents, major car repairs, major appliance replacement or repair, or other life emergencies over which you have no control such as the need to travel for a family emergency. It is important to be able to take care of these needs as they arise. There are two ways to handle it. Have enough money in savings to take care of a major expense or have a credit card with a reasonable available balance. A credit card is the easier option because you never know how much money you may need when an emergency arises. A credit card will enable you to meet emergent needs without having to worry.
Now, aren’t you glad you didn’t cut up all of your credit cards!
Cons of Having and Using Credit Cards
If you don’t practice financial discipline when using a credit card it is easy for credit balances to run high, and before you know it finance charges can double or triple what you owe. This is one of the major drawbacks of using a credit card. It can be overcome, however, if you will impose a little financial discipline and determine before you get the credit card how you will use it.
Having that plastic in your pocket makes it easy to give into your whims and fancies, which can lead to financial trouble. That’s why it is important to stick to the two rules above. (1) Use your credit card only for necessities, and (2) buy only what you know you can pay off at the end of the month. Just because you have the credit doesn’t mean you have to use it.
If you can’t pay off your balance at the end of the month it is time to stop using the credit card. Finance charges will eat up more money than you ever intended to pay for a particular item if you carry a balance. Once you get to that point, pay as much as you can toward your credit card bill and pay it on time.
One of the other major drawbacks of having a credit card is the layering of late fees on top of finance charges. This can become an escalating problem. Your credit card becomes maxed out, if you don’t pay your bill on time then you are hit with a late fee which puts you over your limit. That then leads to an over limit fee, which in turns creates a higher balance to which the credit card company can apply finance charges. This is when credit cards become a liability to your financial help, instead of an asset.
Rightly used, credit cards can have their place in your financial plan. It takes maturity and discipline to use credit cards wisely to build financial health.