When managed responsibly, credit cards are a useful financial tool. But problems can arise when consumers come to rely on credit cards to pay for everyday purchases, or to fund a lifestyle they can’t truly afford. To avoid unmanageable debt, some consumers choose to skip using credit cards at all, while others keep one card strictly for emergencies. Let these pros and cons of credit cards help guide your decision about whether or not to use credit cards.
The Pros
Help Establish a Credit History
Establishing a credit history is necessary if you hope to purchase a vehicle, a home, or take out any kind of loan. One way to begin a credit history is by opening a credit card. Use the card to make a few small purchases every month, then pay the balance on time and in full. Using a credit card responsibly opens the door to other financial opportunities.
Make Life Easier
Credit cards allow you to conduct many business transactions conveniently. These can include reserving plane tickets and hotel rooms, renting a car or shopping online. While it’s possible to use a debit card for these tasks, in most cases using a credit card offers more convenience and security.
Increased Safety & Security
Using a credit card to make purchases can be safer than using a debit card or carrying cash, especially when traveling. If a credit card is lost or stolen, the Fair Credit Fraud Billing Act limits your liability to $50. And many card issuers offer zero-dollar fraud liability. If your debit card is stolen, the process to recover the funds and restore your account can take several days and leave you without access to your money during that time. And of course, if cash is stolen (or you lose it), it’s gone forever.
Coverage for Emergencies
A credit card is one option to cover emergency expenses, such as a major car or home repair. But there’s a catch. You should only use a credit card for emergencies if you don’t have an established emergency fund. We recommend starting an emergency savings account right away and prioritize saving at least $500. Once you reach that goal, keep going until you reach the amount of 3-6 months’ of living expenses.
The Cons
Unmanageable Debt
Credit card debt can spiral out of control quickly. Ideally, you shouldn’t charge any more than you can pay off within the next month. It’s easy to overspend and get yourself into a cycle of debt with mounting interest that’s hard to stop.
Damage to Your Credit
The same credit cards that help you establish a credit history can also damage it. Opening too many credit cards, exceeding optimal credit utilization and most importantly, making late payments or missing payments, can quickly damage your credit and cause your score to drop. Review these tips for managing your credit score.
More Chances for Identity Theft
All those pre-screened credit card offers you receive in the mail aren’t just a nuisance, they’re a threat to your identity. Mail thieves use them to open credit cards in your name, then run them up to the limit before you realize it’s even happened. Minimize the chances of this method of ID theft by opting out of pre-screened offers at OptOutPrescreen.com
Living Beyond Your Means
Having multiple credit cards with high limits can give you a false sense of making more money than you actually do. Using credit cards to pay for a more lavish lifestyle than you could otherwise afford is a sure way to get into problem debt. Aside from emergencies, try to avoid using credit cards to buy anything you couldn’t normally afford if you had to pay cash. Do not use credit cards as a way to stretch your take-home income.
