Credit cards can be a good thing, but are they really attractive? To analyze this, we need to look at the pros and cons of credit cards:
-GOOD EMERGENCY FUNDS
Many people live paycheck to paycheck, unable to put too much money towards their savings account or emergency funds. But what happens if your car breaks down and you need to shell out $1,000 or so to fix it? You might have that money in savings, you might not. But if you have a credit card, you have a way of getting your car back.
-DON’T PAY ANY INTEREST
What people don’t seem to understand is that if you make a purchase, you won’t have to pay interest on that purchase as long as you pay within the 30-day cycle in which you made the purchase.
-BUILD YOUR CREDIT
In order to do this, its very important to understand the ways credit cards can and will affect your credit. First of all, never use more than 30% of your limit. If you have a $1,000 limit, never let your balance get higher than $300. This is called revolving usage, and it’s important you keep this below 50%. That’s why I always advise people to never go above 30%. Also, don’t take out 10 credit cards. This decreases your credit score because at any point you have the ability to rack up a ton of debt, therefore making it more difficult to repay debts.
A third tip is to not open a lot of credit cards at once. If you want to change credit cards, only do so every 1.5-2 years. If you open up a lot of new accounts, that will also decrease your credit score. My suggestion is to keep a low interest credit card as your “keeper” and if you want to open a 0% introductory rate credit card every couple of years (maybe you have a big purchase to make), you can do that. But don’t do it all the time.
-USE SOMEONE ELSE’S MONEY
By using a credit card, you are taking advantage of your own money. It stays in your account until the bill is due instead of coming out right away by paying with cash or a debit card. And as long as you pay it off soon, it won’t cost you a dime to do it.
Whether it’s cash back, airline miles, gift cards, or other gifts, many credit cards give you points for each dollar spent on your credit card. When shopping for a credit card, look for a card that gives you the reward you’re looking for.
-POTENTIAL CREDIT RISK
Similar to the pro outlined above, but the irresponsible users might rack up more debt than they can handle and it ends up being a bad cycle where they need to continue to use it in order to pay for everything. That will only end up damaging your credit. My general rule is to never use my credit card to buy something you couldn’t pay off tomorrow. Or, the more popular form of that phrase: “Don’t buy what you can’t afford!”
-GETTING THE WRONG CREDIT CARD, PAYING TOO MUCH
The only stipulation I have when shopping for a credit card is to find one with no annual fee. That’s they only way a credit card company has ever made money off of me, because I pay things back quickly. When you get a credit card, get one with no annual fee…or at least a small annual fee.
-TOO EASY TO GET CARRIED AWAY
It’s very difficult to tell how much you’ve spent on your credit card until the bill comes. Oops, I spent $300 last month! Even if you check your bank balances frequently, those don’t show what you’ve spent on your credit card, so it’s easy to get carried away. Deduct the amount from your checkbook when doing your usual balancing of the checkbook. Then you realize that you’ve spent it and you also know what your account will be when you pay the credit card off.
-IT CAN COST A LOT
Many people make the minimum payments every month, and it will take years to pay that balance off. When you make the minimum payment, you pay more interest than you do principal. If you’re in deep, make an extra $50 payment every month to chip away at it. But, in general, don’t spend what you can’t afford!
In the end, all it takes is discipline, responsibility and organization in order to turn a credit card into a positive thing. Choose the right credit card for you and don’t spend more than you can afford. You’ll find that a credit card is most helpful!