When you need to purchase something that’s beyond your means, a credit card is often the way to go. It provides an instantaneous and secured method of payment, which can be especially helpful when you’re in a pinch and short on cash. But they also have their downsides. Credit cards charge interest, have monthly-deductible fees and don’t offer rewards like a debit card or gift card do. If you’re looking for more information about the advantages and disadvantages of credit cards, then read on.
The Advantages of Credit Cards
Improvement in Credit rating
Credit cards can improve your credit score. When you use your card for purchases and make payments on time, this builds your credit score up. This becomes especially helpful when applying for loans or mortgages in the future. You have to make sure that you pay off balances regularly and avoid any late charges or payments.
Free Short Term Credit
It’s smart to use credit cards when you have an unexpected cost or expense that you don’t have the immediate funds to pay for.
Just remember that there is an important distinction between emergency costs and negative cashflow. Emergency costs are things like unexpected car repairs that need to be paid for. Negative cashflow is money you’re not making because you’re spending more money than you’re earning.
Protection of payments
They provide you with a sense of security when making purchases online. Payment protection for credit cards is much better than debit cards as you can get back your money or limit your losses if fraudulent transactions have occurred on your credit card. Credit card companies are required to have fraud-protection policies and they will reimburse for significant losses.
Rewards and Incentives
The credit card industry makes its money by collecting fees from merchants whenever you make a purchase. If you properly look around you’ll find a credit card that gives you cashback for your purchases (usually 1-2%) and that can quickly add up if you use your card often.
The Disadvantages of Credit Cards
Bad for your credit rating
The downside of credit cards is that they’re linked to your credit report, which can lead to a bad credit rating. For example, if you carry a balance from month to month, the amount of interest will be added to your overall balance. If you have other negative balances on your report, some creditors may choose not to offer you credit in the future. It’s important for you to keep your credit score as high as possible because it affects the rate of interest you’ll pay, what type of loans and lines of credit you should apply for.
Increased Interest payments
One of the biggest disadvantages of credit cards is that they charge interest on your purchases. This means that if you’re not careful how you use your credit card and don’t pay it off every month, you could be charged an additional amount for not paying it back. This can be especially costly if you’re using a 0% interest promotion and you end up spending more than what you originally intended to.
Risk of increasing debt
Some people will use credit cards to purchase something they can’t afford to pay off all at once. If you get behind on your payments, your credit score will take a hit and it could take years, or potentially even decades before you’re back on track. There are also fees that accompany using a credit card. For example, if you go over your limit or don’t pay interest for a whole month, the company may charge a late fee.
Another issue is that some people manage their debt poorly and spend unwisely. With credit cards, you have access to lots of cash but it’s easy to be tempted by large purchases with no set repayment plan. If you’re not careful with how much money you’re spending each month or trying to get ahead in other ways too (like saving up), then you could end up taking out loans that are difficult to pay back in full.
Credit cards have many benefits, but it’s important to consider the drawbacks as well. While a credit card might help you manage your debt, it could also cause damage to your personal credit score. It’s important to thoroughly work out if the benefits far outweigh the cons of using a credit card before signing up for one.