Credit cards have become an essential part of everyday life. You might have one or two… even three on your wallet right now! You get the card from a bank or a credit card company. You can make purchases or pay bills on credit using it. Quite literally, you spend money that you don’t have in the card which is its main difference from the debit card. They are also different from unsecured loans because you can’t withdraw the funds for any use.
You have to pay back what you spend in the form of monthly payments plus interest charged. There are so many credit cards issued by various companies and banks to choose from. There is no limit to how many you can have but it’s better to have one or two. This way, you can pay back easily and minimize spending on essentials only. There are also various types of cards like travel and students’ card to cater for your needs.
To better understand how credit cards work, you need to learn about the Annual Percentage Rate (APR). This is the interest charged on the balance that is on your card at the end of the year. A credit card can be very appealing but remember each card has a set limit of how much you can spend. Owning too many cards that max out the limit takes a hit on your credit score. There are also cards that charge 0% APR for the first several months. You can consider such offers.
The truth is, credit cards can be quite convenient and help you manage your finances. Having a card for essentials lines up with your monthly budget at the end of the day. This way, you can keep up with the payments and even improve your credit score in the process. But, these cards are not without their share of disadvantages. If you don’t keep an eye on spending, you can dig a financial hole which getting out of won’t be easy.
This is why it’s important to first grasp the advantages and disadvantages of credit cards before signing up for one.
Advantages of Credit Cards
1. Build Credit History
This works especially if you are a student or just joined the workforce after turning 21. You should start building your credit history and create a credit score. This benefits you immensely in the future where you will have to make heavy financial decisions, like taking a secured or unsecured loan. A starter credit card might charge a higher interest but the benefits are worth it.
2. Great Rewards
Most credit cards come with good rewards. Some have cashback rewards of 1 to 5 % on purchases made. Keep in mind the duration offered for this promotion. Mostly it’s three months after you sign up for the card. Others have an annual cashback reward of a set percentage of all purchases made or for certain categories like grocery shopping, or gas.
3. Better than Cash
It’s safer to use your credit card while making purchases than carrying cash. This comes in handy, especially when making large purchases that would require a lot of cash. There are even establishments that don’t accept cash for such enormous transactions. It’s simple, if robbers know a certain store has plenty of cash daily, then it becomes an easy target for them.
4. Cash Advance
Though credit cards are mainly used for purchases or paying bills, you can get a cash advance. Simply request the cash but it comes at a cost. The credit card issuer charges you an extra fee to give you the advance. An advance is ideal for quick emergency cash.
5. Debt Consolidation
In case you have more than one card with different balances, you can opt to consolidate all in one card. Simply transfer the balance to one card. To get the best deal get a card that has benefits like a lower balance transfer fee and a longer period of 0% Intro APR. Some can last up to 21 months. you can also use unsecured loans for debt consolidation.
6. Easy International Transactions
Instead of getting cash and exchanging it to the local currency when you travel abroad, simply pay with the credit card. Keep in mind you might be charged some foreign transaction fees but not in all cards.
Using a credit card might cost a little extra but it is convenient. You get a monthly statement that shows all transactions made. There is no need to keep multiple records like when using cash.
8. Purchase Protection
When you make a purchase with a credit card, you get extra protection. This comes in handy in case the item is the wrong size, color, or comes damaged. This adds to convenience when buying online and the item is delivered to you.
Disadvantages of Credit Cards
1. High Credit Rating
For a credit card with low interest charged and a higher limit, you need a good credit rating and score. Without a good score, lenders tend to issue cards with high interest rates. These are not convenient especially when trying to repair your credit history. You might find yourself in a deeper hole financially.
2. Impulse Buying
Since you know the card has a limit, you might be tempted to make unnecessary and expensive purchases. The same applies when you give the card to your child. They can easily go on a spending spree and you have to pay all that money back with interest.
3. High-interest Rates
Credit cards come with a high interest rate that increases the amount you have to pay back monthly. At the end of the year, the APR applies to the balance remaining on the card. At the end of the day, you pay back even more.
4. Foreign Transaction Fees
Some cards charge a percentage of the purchase made abroad. This is usually around 3% of the purchase as long as it’s in a foreign country.
5. Annual Fees
Though most credit card companies don’t charge an annual fee, there are a few that still do. Be careful while filling out for one. Check if they have this additional charge or not.
6. Decreased Credit History Rating and Credit Score
You should maintain an excellent credit rating and high score always. Having multiple credit cards can affect your credit history negatively. Try as much as possible to never max out the card or reach near the limit. Credit card companies flag such cards and report them as bad credit. This affects your credit history negatively and can lower your credit score.
7. Credit Cards Fraud
The number of fraud schemes that target credit cards is steadily increasing with many people falling victim. Tougher measures have to be put in place and increased protection of victims. You can get compensated but it takes too long and tends to be a tedious process to follow up. Rarely are victims compensated the full amount.
8. Additional Fees on Cash Advance
Though you can get cash from credit cards, it’s very expensive to do so. Credit card issuers make it very hard to get cashout and charge very high-interest rates for this service. This is why credit cards are mostly for purchases or paying bills.
It’s no secret that credit cards can be quite beneficial, but they have equal perils to watch out for. Use the card to plan your finances and not for impulse buying that can land you in serious debt. The best cards have lower interest rates but need you to have a high credit score. Before you sign up, find out if it charges extra for foreign transactions or has annual fees. All these extra charges tend to add up.