By now we’re all aware of the dangers of overspending with credit cards. However, there are some serious advantages to having credit if you’re financially responsible. Below are five pros and cons to think about before you sign up for your next credit card.
Pro: Emergency Money. You may not expect your car to break down and leave you with a $1,000+ repair bill, but if it does, a credit card can get you back on the road quickly. There are plenty of emergency situations that could cause a major disruption in your daily life. With credit readily available, you can breathe a little easier knowing you have a backup.
Con: Expensive. High interest rates and minimum monthly payments are designed to take as much money out of your pocket as possible. Don’t be fooled by 6 months of no interest or rewards for spending $500 in the first month. Credit card companies make a lot of money off interest payments, so if you aren’t careful, you could find yourself in a financial hole that is difficult to climb out of.
Pro: Builds Credit. If used responsibly, credit cards can build your credit. Using credit and paying it off quickly demonstrates to lenders that you’re financially responsible. This can translate into benefits, including the ability to get a loan and low interest rates.
Con: Bad Credit. Having too many credit cards or maintaining high balances can negatively affect your credit score. If your credit score gets too low, you may not be able to get a loan or will be forced to pay high interest rates. If you can’t show creditors you’re responsible, you will (literally) pay for it.
Pro: Rewards. Many cards now offer rewards, such as cash back or money towards online purchases. For example, the Chase Freedom card gives you 1% cash back on every dollar you spend, and 5% back in select categories. If you use your credit card for the majority of your purchases, you can earn significant savings.
Con: Hidden Fees. Annual fees or rising interest rates can catch you off guard. If you’re not careful about checking the terms for reward cards, they may not be worth it.
Pro: Travel. Traveling with a credit card is easier than traveling with cash. With a major credit card you can withdraw money from ATM’s all over the world. This saves you time and hassle while on vacation.
Con: Fraud. If your card gets stolen and you don’t report it quick enough, a lot of damage can be done to your credit.
Pro: Necessity. Some services require the use of a credit card. I remember the first time I tried to rent a car. I had good credit and enough money for the rental, but no credit card. Thus, no company would rent to me. This was extremely inconvenient – I got a credit card the next week.
Con: Overkill. It seems like every store I walk in to offers me a discount for signing up for their store card. If you sign up for cards just to get a discount, you could end up spending more in the end from spending more than you normally would with cash, not paying off the balance in full, and getting stuck with high interest payments.
The conclusion? Avoid signing up for store cards at places you rarely shop at. Be diligent in checking your statements for discrepancies, and try to pay off whatever charges you incur as soon as possible to avoid high interest rates and balances that spiral out of control. If you follow these steps, credit cards can be highly valuable.