Credit Card Pros and Cons
Credit cards can be a really useful tool for managing cash flow. Each purchase you make with a credit card is made with money you have borrowed; essentially, each purchase is a loan that needs to be repaid at a later date. Interest is charged on the credit card balance if the amount is not repaid during the interest-free period, and as such, can become quite expensive if not properly managed.
Credit Card Pros
- Security. Credit cards offer zero-liability policies, which means that if your card is lost or stolen, you will not be liable for any unlawful purchases made using your card.
- Flexibility. No amount of planning can change the unpredictable nature of life. Emergencies, spontaneous purchases, and unexpected bills are just a few of the financial surprises that can come up in everyday life. Credit cards give you the freedom to be able to fund these situations when you otherwise couldn’t afford to. Just ensure you have the means to pay it back or you could face huge interest costs.
- Rewards. There are many programs available that reward the customer with points for making purchases with their credit card. The points can be exchanged for things such as flights, gift cards, travel benefits and even cashback.
- Positive Credit History. A credit card is a loan, which means paying back the loan in the required timeframe reflects well on your credit score. Building a positive credit history will help for when you want to apply for larger loans such as for a car or a home.
Credit Card Cons
- Splurging. When you’re not seeing a physical exchange of money it can be easy to get carried away with your spending. Credit cards do not offer free money — they are a loan that you are legally obligated to repay. If you are spending beyond your means with a credit card you could be hit with hefty interest payments.
- Late Fees. Along with interest repayments come late fees. If you cannot make the repayments before the required time then you could end up paying a lot more than the original purchase price of the goods or services you funded with the credit card.
- False Safety of a Balance Transfer. A balance transfer is used to transfer credit card debt to a new credit card with a lower interest rate to help make the debt more affordable to pay off. The danger comes when consumers continue to make purchases with the new credit card because of the attractive lower rate when really, they need to focus on first paying off the original debt. Adding to a credit card when you’re already in debt is a dangerous practice.
- Negative Credit History. As discussed above, if used sensibly, a credit card can be beneficial for your credit history. But if spending gets out of hand and suddenly the interest costs and late fees are snowballing, your credit history is going to be negatively affected.
There are many fantastic benefits of using a credit card but these need to be weighed up against the negatives before deciding if they’re the right choice for you.