As our society becomes more digitized, it is no surprise that most people do not carry a lot of cash on their person anymore. Now most shopping transactions are done using plastic cards with credit cards being the most used point of sale method. According to the Federal Reserve, 79% of Americans have at least one credit card or charge card in 2020. The benefit of having extra unearned cash at your disposal that can be used now and repaid later is the primary benefit of credit cards and the reason they are so popular. However, there’s a dark side of credit card debt that makes most financial experts warn against relying on them excessively. So, let’s answer the question “Are credit cards bad?”
Pros
Build Credit History
One of the primary benefits of owning a credit card is that it helps to build the user’s credit history. Your credit history is then used to determine your credit worthiness that is represented using a FICO score. This number usually ranges from 300 to 850. The higher the score, the more credit worthy you are perceived to be to a lender. Your credit score is also inversely correlated to the interest lenders will charge for lending you their money. The lower your credit score, the higher the interest rate you’ll be charged on your loan. Utilizing your credit card responsibly can result in a good credit history and thus the owner may receive more favorable loan terms. If you want to know more about credit scores, check out this blog [4 Hacks To BOOST Your Credit Score].
Value Added Perks
Another benefit of owning a credit card is the competitive perks offered to the card owner. Credit card perks can include cash back, travel miles and access to exclusive venues and travel. Additionally, credit cards that are associated with department stores offer steep discounts to encourage shoppers to use their credit cards more frequently. A personal perk that I also enjoy from using my own credit card is travel insurance. This is a great incentive for frequent travelers who want to save money on insurance when they travel. Lastly, a few companies offer loyalty points that can then be converted into dollars or travel miles to be used by the card owner.
Cons
High Interest Rates
Credit card companies are notorious for charging inexplicable high interest rates. To put things in perspective, as of today, the Federal Funds Rate is 0.50%, the average mortgage rate is 5.3% and the average credit card rate is 18.3%. There are instances however, when companies will charge the card owner as much as 25%. Such a high interest rate makes it more difficult for the card owner to pay off their debts. This is the primary reason why I advise persons to pay the complete credit card statement balance when it is due. Otherwise, you can end up paying twice as much as the initial statement balance due to high interest.
Confusing Terms & Conditions
When you received your most recent credit card, did you read the terms and conditions? If your answer is no, you’re like many others who neglect to read the terms and conditions that they have agreed to. By law, companies are required to give their customers relevant information pertaining to the use of credit cards. This includes the interest rates, late fees, penalties, payment schedule and the total repayment amount over time. The difficulty though, is companies use jargons and unclear terminologies when stating the terms and conditions. This leaves the credit card owner confused about what exactly they are agreeing to. As a result, they are unaware of their legal rights if a dispute were to arise.
Prone To Excessive Use
It is easy for persons to fall into a habit of purchasing more than they can afford when they use a credit card. When you make a purchase with your credit card, the money is not immediately drawn from your account. Because no money is seen to be exchanged for the purchase, users use their credit cards more frequently and for bigger purchases. When the bill comes however, the user can not afford to pay the balance in full and settles for paying in portions. Some users even opt to pay the minimum amount each billing cycle. They are then subjected to high interest and greater difficulty paying off their debt. For strategies on how to manage you debt read my blog [Effects Of Poor Debt Management In Your Twenties].
Are Credit Cards Bad?
Credit cards are NOT inherently bad. There are two things however that can make them bad. Firstly, the issuing company offers the card owner unfair terms. Credit card companies will charge high interest rates, late fees and yearly fees in the hopes of getting the most out of the transaction between themselves and the credit card owners. Secondly, the credit card user misuses the credit card. Some people are more prone to excessive debt than others. They have many credit cards and accumulate massive debts that they struggle to repay. So, to determine if credit cards are bad for you, determine if the terms you’re being offered by the issuing company is fair. Then determine if you are responsible and have the discipline to manage your debt well. Your response will determine if owning a credit card is bad for you.
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