Credit cards are one of the more valuable tools available for personal finance. They have a number of benefits that make them preferable to cash, which is why almost every wallet is equipped with at least one credit card to help individuals make some of the purchases they need.
However, credit cards are far from perfect. There are many weaknesses to using and handling credit cards that can cause serious problems with your own personal finances. In this article, we will explore some of the pros and cons of using consumer credit.
Credit Card Pros
• Cash Replacement
Credit cards are single, small pieces of plastic that can replace cash in your wallet. Cash is a less effective form of currency, because it can be lost, mishandled, or unavailable when you need it. Credit cards are always there, taking up little space, and as long as you are managing your personal finances correctly, they will always have enough on them to cover the purchases you need.
Consumer credit can make managing your personal finance easier. You no longer have to worry about making purchases paycheck to paycheck, because you have an interim method of payment if you need to wait for money to clear in your bank.
• Online Shopping
Credit cards can be used online in a way that cash can’t. In addition, there is an added level of security knowing that should someone steal your credit card information, they will not be stealing your money – they’ll be stealing the bank’s money.
• Emergency Money
Consumer credit can also act as emergency money in the event that something goes wrong. When my car broke down, I used my credit card to pay for it because I didn’t yet have the cash in the bank. If I had to pay for it in cash, I would have been late on my rent.
• Building Credit
Lending agencies need some way to understand whether or not you are a risky borrower. Credit cards give them insight into how you manage your personal finance, allowing you to build up a credit score that will ultimately qualify you for things like home loans, car loans, etc. Without a credit card, lending agencies will have no idea how risky you are as a borrower, and may not be willing to give you a good rate.
Some consumer credit cards come with perks, like frequent flyer miles, cash back rewards programs, etc. The value of these perks is relative to the amount you use your credit card, but those that have a good understanding of personal finance may receive a variety of valuable benefits from using their credit card often.
Credit Card Cons
There is no doubt that credit cards make it easy to fall into debt. When I was in college, I was forced to depend on my credit card for things like food, clothes, etc., since a part time job in Seattle didn’t pay enough to cover all of my bills. As a result, my credit card maintained a high balance for years, and while my interest was low relative to my peers (luckily I understood how to manage my credit at a young age), I was still losing thousands of dollars in interest while I had that debt. Racking up debt is far too easy when you have a credit card.
• Personal Finance Mistakes
Few people are actually aware of what affects your credit score. Signing up for in-store credit cards, for example, is a great way to ruin your credit. Every credit card you have is a mark against your overall credit score, and it can be far too tempting to sign up for every bonus credit card you see, only to find out that lenders are unwilling to give you a loan in the future without a massively high interest rate. There are several common personal finance mistakes that occur when you start using credit cards.
• Stolen Numbers
While credit cards in general are valuable ways to avoid significant problems related to theft, they are also easier to “steal.” I rarely use my cards online – and only use them at reputable websites when I do. Yet somehow I have had my card number stolen and used a whopping 11 times, and used not only in countries all over the world, but also within my own city. Not once has the credit card ever actually been lost – it was in my pocket the whole time. There are far too many ways to steal a card without actually taking the card, and although I’ve never had to pay for any of the money that was stolen, it’s still a considerable inconvenience.
• Fees, Interest, Etc.
When you buy something on a credit card, you’re also paying extra – for any of the fees or interest that may be associated with that card. When I was in credit card debt, my balance barely changed despite months of paying it off. Why? Because that entire time I was almost entirely paying off interest alone. That’s money that is lost forever, and brought me back nothing in return.
• Temptation to Abuse
Finally, credit cards represent a remarkable temptation that even the best of people can sometimes struggle to avoid. Credit cards act like free money, and it’s almost too easy to decide you no longer want to pay back your balance in full, and instead want to splurge on yourself and only make the monthly payments. Yet doing so can be so harmful to your credit that it may take years – even decades to repair the damage. Consumer credit may be designed for convenience, but it’s clearly very risky.
Overall Thoughts on Credit Cards
Credit cards are an important part of personal finance, but they are by no means perfect. It’s not uncommon to find that despite educating yourself on the pitfalls of consumer credit and trying your best to make your payments on time, you still fall into a great deal of debt. The best thing to do is limit yourself to one low limit credit card, manage your finances regularly, and try your best to save for emergencies. That will help you avoid many of the weaknesses of credit cards while you enjoy the benefits.