Let’s take a look at the “pros and cons of credit cards.”
The debate over whether the use of credit cards is good or bad is fierce, and seemingly never-ending. Many people feel that credit cards are the root of all evil, while others look at the benefits credit cards afford consumers. But the key to the debate is truly understanding what a credit card is, and is not.
What Is a Credit Card?
Let’s talk about what a credit card is. A credit card is a payment method that allows consumers to buy goods or services on credit. Consumers can buy items without having the available cash on hand, and pay at a later date. A minimum payment is due every month on revolving accounts – if the credit card is a charge card, the full balance is due at the end of each month.
Now that we have the basics down, let’s talk about what a credit card really is, and why we need them. Let’s face it; we are a credit-driven nation. Almost every consumer in the United States has a credit card, and nearly every merchant in the United States now accepts credit cards as a form of payment.
Heck, they can even be used at parking meters, and many airlines now ONLY accept credit cards as opposed to cash. At the end of the day, credit cards are a convenient form of payment, and it’s almost impossible to get by without one these days.
In fact, if you want to qualify for larger loans such as auto loans or mortgages, you must establish and build a solid credit history, often through the use of credit cards. So it’s not so much a matter of choice, but a matter of necessity.
Many opponents of credit card use, such as Dave Ramsey, say you can and should live without credit cards, but they fail to realize that banks and lenders won’t give you a loan without credit history. And how many people can actually buy a home outright, without a mortgage? Or even a car for that matter?
Credit Cards Aren’t Free Money
All that said, it’s important to note that a credit card is not free money, contrary to popular belief. You must pay the money back, and if you don’t, you will be assessed finance charges and possibly penalties. That said, a credit card isn’t an option to avoid getting a job. A credit card is not intended to be a means of overextending yourself either.
If you don’t have the money, or you won’t be getting the money soon, don’t charge it. It’s as simple as that.
If you have a commission-based salary, it could make sense to charge purchases to a 0% APR credit card and pay them off when the money becomes available. But if you’re a college student spending money you don’t have, you’re heading straight for trouble.
Credit Cards Offer Convenience and Security
Along with the much needed credit history credit cards can provide, they also offer convenience, flexibility, and security. How many people want to go to the bank several times a week to withdraw cash? And how many people want to fumble through their wallet to make payments at every merchant they visit?
Credit cards offer a form of flexibility. If you don’t get paid regularly, you may have trouble paying for items at the time of purchase. With a credit card, you can make the purchase now, and pay later. Or during tough times, you can make the essential purchases you need today, and pay once you get back on your feet, of course, with a portion going to the credit card issuer.
Another very important and often overlooked positive aspect of credit cards is the security feature. It’s not smart to carry around large quantities of cash for any reason. With a credit card, you can leave your cash in the safe hands of your bank.
Along those same lines, using your credit card for purchases is safer than using cash because you’re purchase is documented, and most credit card issuers will allow you to dispute any purchases with the merchant if any problems arise. If you pay with cash, you’re on your own. And there’s often no transaction history associated.
Many credit card issuers also offer extended warranties simply by using the credit card for purchase. Instead of getting a 12-month warranty on that big screen, you’ll get two years free of charge.
Credit Cards Come with Rewards
On top of that, many credit cards also come with hefty rewards, including cash back, gas rewards, and much more. You basically get “free money” for charging everyday purchases, and are essentially encouraged to use your credit card at certain establishments more, thanks to rotating spending categories.
This is a dangerous game, as you only get a small percentage of each purchase back, such as 1% or 2%, or perhaps 5%. This pales in comparison to the cost of the purchases, especially if they are only made to obtain the bonus.
When it comes down to it, credit card issuers aren’t dense. They aren’t offering up free money unless they know doing so will be profitable, so spend carefully! Yes, you can earn some serious cash back with a credit card, but you’ve got to know how the game works.
Many credit cards also offer free insurance for things like travel, car rentals, and so forth, which can come in handy and save you money if anything goes wrong.
Credit Card Pros
- Build credit history
- Allow for flexible spending
- Provide security and convenience
- Document your spending (helpful for taxes)
- Come with free insurance and extended warranties
- Offer cash back and other forms of rewards
Sure There Are Drawbacks…
Some argue that the cost of credit drives up prices and makes us spend more. There’s certainly an argument there as the disconnect between money changing hands is evident when cash isn’t even present during the transaction.
Additionally, the use of credit can hurt your credit score and make access to credit in the future more difficult. So you have to manage your credit responsibly, or pay the price, literally, in the form of higher interest rates on future lines of credit.
And with exorbitant credit card fees, penalties, and the possibility of overextending one’s self, the debate will surely rattle on.
Thankfully, credit card issuers are beginning to clean up their act and make the terms and conditions more clear, and penalties more reasonable. But the question of credit card use shouldn’t be so much about whether they’re good or bad, but if we as human beings are responsible enough to use them.
Credit Card Cons
- They are often misunderstood to be free money
- Drive up the cost of everyday goods
- Can lead to overspending and overextending oneself
- Can hurt your credit score if abused
- Come with exorbitant fees and high interest rates
- Contain tricky terms that may land inexperienced users in hot water
- May come with an annual fee
Yes, I Use Credit Cards Nearly All the Time
In case you were wondering, yes, I use a credit card for pretty much all of my spending. I have a stable of credit cards I use for different purposes. For example, if I want to earn 5% cash back on gas and groceries, I swipe with my Blue Cash from Amex.
Additionally, I take advantage of credit card portals that offer the chance to stack cash back bonuses, such as ShopDiscover and Amex Offers.
And I’m always happy to take advantage of an awesome sign-up bonus to get tons of miles or points for spending a certain amount of money in a specified period of time.
You can see all the cards I carry in my wallet if you look to the top right-hand side of this page.
Just remember that I’m a responsible spender. I wouldn’t use credit cards if I couldn’t control and keep track of my spending. Lastly, I always pay my credit cards off in full each month. And so should you, unless you’ve got 0% APR.