They are on the internet, on television commercials, in the mail, and on the radio; credit card marketing schemes targeted at young spenders. Like the Capital One slogan goes, “What’s in your pocket?” Coming from a person that has had over forty different credit cards over the past fifteen years I speak from experience when it comes to the good and bad about credit cards that are in your wallet.
Credit cards have always had a bad stigma attached to them, especially with the current economy we live in today. However, credit cards are not always a bad thing and if used properly can have very significant positive impacts on your credit score and future credit history and vice versa if not used with responsibility.
Positive Features of Credit Card
1. Increased Credit Score: When you have 2 – 3 credit cards and you use them responsibly to purchase groceries, gas, or a few retail items and never charge more than half of the credit limit, or better yet more than what you can pay off in one to two paychecks, then your credit score will slowly begin to increase as you create a credit history. For example, I use my credit card to pay my basic utility bills each month. I then pay the credit card balance the next month as if I were paying my utilities. I have seen my credit score increase over the past two years by 20 points using this method.
2. Reward Programs: Another great aspect of credit cards are the many benefits provided through credit card reward programs where the credit card holder receives perks for their spending habits . Nearly all credit card companies provide some sort of bonus or reward for charging purchases on their card. For example, my credit card company, Capital One, provides redeemable gift cards or sky miles for making so much in purchases.
3. Convenience : The reason credit cards are so popular is due to the fact that they are so convenient. One thin piece of plastic can be used to purchase merchandise online, pay bills online, and provide security (e.g. no need to carry cash). In fact, I don’t even carry a wallet in my back pocket; instead I carry a credit card and my driver’s license in my pocket.
4. Record Keeping: In my personal opinion a credit card is a great way to keep track of expenses. At the end of each month the credit card companies will send a statement with all charged expenses listed. If a credit card is used to pay bills and utilities then this is a perfect way to keep track of expenses that were paid and the dates they were paid on. Welcome to the 21st Century check book ledger.
5. Emergency Needs: Sometimes it is good to just have a low balance credit card with approximately $2,000 available that is only used for the purpose of unexpected events. I always have a credit card stored in a convenient place that is accessible nearly 90% of the day for the specific purpose of emergencies. I never use this card except for emergency purposes.
Negative Features of Credit Cards
1. Debt: With the misuse of credit cards come problems. One of the major disadvantages of credit cards is the fact that if used for the sole purpose of income, then debt will pile up quick. Studies show that those who use credit cards in place of income end up getting credit after credit card and maxing them out causing an uncontrollable debt to income ratio that ultimately kills ones credit score and puts them in a place that is hard to get out of without bankruptcy. When I was younger I put myself in this same predicament where I had over 10 credit cards at one point and each were at a maximum balance. It took over four years to clear this negative debt and put a huge mark on my credit score that took years to bring back up.
2. Negative Credit Score: As stated previously, the misuse of credit cards can lead to a negative credit score. Having too many credit cards and having credit cards that are near or at their maximum balance seriously jeopardize a person’s credit rating. In today’s economy a poor credit score can keep someone from getting car insurance, renting or purchasing a home, and even make them unemployable with certain businesses.
3. Hidden Fees: This is one of those areas that people hardly ever consider when signing on to a new credit card; the hidden fees. If you fail to look at the fine print and do the necessary research you could be signing on with a credit card company that charge sign-up fees, monthly or annual fees, and even usage fees. I had to find this out the hard way. I failed to look at the fine print on a credit card application I received in the mail, but after seeing the low interest rates and the approved credit limit I couldn’t resist. As soon as I filled out the application and activated the card I was immediately assessed a $150 activation fee and two weeks later was assessed a $30 monthly fee. I hadn’t charged a dime and I already owed a balance of $180 in only one month. I immediately paid the balance and shut off the card, which ended up taking points off my credit score.
4. Convenience and Over-Spending: I know I said convenience is a positive attribute of credit cards, but I also said if it was used responsibly. If someone goes out and gets a store credit card, turns around and charges a 52″ flat screen HD television and then goes on to by DVD players and movies, etc. then that irresponsible use just turned into a negative attribute and will lead to troubles.
5. Late Payments: When someone gets themselves into that place of incredible debt from utilizing a credit card to live day-to-day they may run into a situation where their monthly minimum payments are more than what they make in a paycheck. This is actually one of the biggest issues in our society today. When this happens it is highly probable a payment will be missed. When this occurs credit card companies could and most likely will start tacking on late fee penalties, which can lead to bigger issues in the end. These fees are usually tacked on to your existing balance getting you closer to the maximum limits. Once those fees pass that maximum limit the company then begins tacking on more fees for being over the limit. Next thing you know you are $200 over your credit limit and have a minimum payment five times what it is usually causing a financial burden and leading to poor credit scores.
Credit cards are not always a bad thing, but rather a good thing if used responsibly and not carelessly. If you protect yourself and use a credit card for the specific purpose of increasing your credit score and emergencies then in the end you will be better off. As I have stated previously, take it from someone that has been there and done that.