Credit cards are useful tools in the right circumstance but there are pros and cons to owning one.
Credit Card, A Tool In The Right Hands
Credit cards and credit card ownership is not what it used to be. In my parents day a family may have had one, maybe two, credit cards with very low balances if any. Today everyone has a credit card, probably 3 or 4 if not more, with balances carried over for months. The amount of credit card debt in the world today is staggering and yet more and more debt is issued each day. Regardless, credit cards are part of our daily lives that we are likely not to see an end to. For some they are a safety net never to be used, for some they are an irresistible temptation to spend and in between they are a tool savvy individuals can use to recover from debt and build wealth.
Credit History – This is the old Catch 22. You have to have a credit history to get credit but you can’t get a credit history without credit. Credit cards are a great way to establish a credit history and can be acquired in several ways. The easiest way would be through your bank, if not there then through a credit card company or with a local merchant. If you just can’t get a credit card you may choose to go the route of a cash secured card specially intended for the purpose of building credit. This is different from pre-paid ATM cards, this is a card that operates just like a credit card, usually with a low balance, secured by a cash deposit. Building credit history is key to your credit score. Credit monitoring agencies use data provided by the credit companies to assign a score. Positive credit history, paying on time, paying down balance and not carrying high balances results in higher scores. Negative credit history such as carrying high balances relative to the limit, late payments and failure to pay result in lower credit scores. Score is important because it will dictate the ease with which you are able to obtain new credit in the future such as auto or home loans.
Convenience – Aside from building credit history the most useful aspect of a credit card is convenience. They can be used just about any where, even over seas and provide immediate access to buying power above and beyond your income. They can be used to cover emergencies, for large purchases you would otherwise have to wait to make, they allow you to pay over time and often provide discounts or miles. Miles are points earned by using the card and paying the minimum each month. Points can be used to get special deals and even free airline tickets and hotel rooms. Further, credit cards allow you to make purchases over the phone or across the internet and relieve you of the burden of making wire transfers or mailing a check.
Safety/Security – Credit cards provide a certain amount of security you can’t get with cash. If you lose your card or it is stolen you can cancel it, if you lose cash it’s just gone. Canceled cards can not be used and any purchases made after the card was stolen will not be charged to your account. Further, most credit companies monitor transaction activity and alert you when potentially fraudulent purchases are made.
Records/Financial Activity – A benefit of credit cards is record keeping and your financial activity. Credit companies will provide a detailed statement of activity and even track spending habits for you. This is a terrific tool for budgeting purposes, useful for individuals and small businesses. Monthly bills, all monthly expenses, can be consolidated into one payment using the card. An added bonus; consolidating bills to the card is a great way to build miles and take advantage of special offers.
Making Reservations – Credit cards are crucial for making reservations at hotels, airlines, for automobiles and just about every other form of travel. They are also necessary when renting equipment such as bikes, snowboards, skis, surfboards, jet-skis or anything else you may need.
Disputes – Credit cards allow you to dispute bills errors and defective merchandise. If a bill is wrong the company can withhold payment until it is corrected. If you buy a product through the mail that turns out to be broken or otherwise defective you usually have 30 days or more to return it and not be charged.
Drawbacks Of Owning A Credit Card
Owning a credit card isn’t all fun and games, read on to find out the major risks of owning one.
6 Risks Of Owning A Credit Card
While I think it undisputed that owning a credit card is necessary in today’s world it is also undisputed that there are many drawbacks to them. Not least of which is cost. It cost you money to own a credit card. Some cards will charge monthly or annual fees, all will charge interest. The amount of fees and interest you pay is directly related to your credit score. Higher scores results in higher credit limits and lower cost, lower scores result in lower limits and higher cost. After credit score, paying off balances is the best way to keep cost down. Rolling balances over from month to month can increase the cost of your purchases exponentially and tie up income into the future.
Temptation To Spend – In the right hands a credit card is a useful tool. In the wrong hands a credit card is a temptation to spend that leads to a world of debt. While providing increased liquidity and spending power credit cards are debt that must be repaid. If balances are not paid off monthly payments may become a burden and lead to increased cost over the long term. Purchases and spending must be matched to income and your ability to pay off the debt in a timely manner.
Over The Limit Fees – If you do not keep your account balance below the limit you will be charged fees. In general, a credit card company will not allow you to go over the limit intentionally but it is possible, especially if your balances are near the max and monthly service charges are added in. Feed are typically a fixed amount and could be as high as $50. Fees not only tie up current income, they increase the cost of your purchases and can lower your credit score. If the credit company reports the late payment it will count to lower your score.
Too Many Cards – It seems like every store you go into, every retail website, wants you to sign up for a new credit card. The may offer you a deal and it may fit into your budget but it may still be a bad idea. Having too many credit cards is a red flag and can lead to lower credit scores. This is especially true if the balances are high and you have a high debt to limit ratio. The more you owe the bigger the chance you will be late or default on one of your payments.
Fraud and ID Theft – Credit card fraud and ID theft are on the rise. It’s only natural as more and more merchants and consumers turn to the web for commerce. Not only are you at risk of having your information lost or stolen during a transaction there is risk of having it stolen from the merchants data banks or from your credit card itself. Every time you use a card, whether online or not, it is being sent across the web and is put at risk of theft.
Lost or Stolen – It happens from time to time. You misplace your wallet or lose it, or drop your card somewhere and don’t notice it until later. Lost or stolen cards can be dealt with but it may not be easy. You will at least have to contact the credit company and, depending on when the card is lost and when you report it, transactions may have to be disputed.
Failure To Pay – This is really the worst that can happen when owning a credit card barring major fraud or errors. Failing to pay a credit card bill or balance, defaulting, can and will result in lower credit scores. Lower credit scores will result in lower balances for new credit, or even denial when applying for new credit. This applies to all credit applications including auto and home loans.