The Perils of Credit Cards: How to Avoid Them
Credit cards seem like "free" money, and this misunderstanding makes them potentially problematic, especially for new and inexperienced cardholders who do not know how to use them properly. Besides, with some easy-to-get credit cards on the market, those who do not have one will want to apply, and those who already have one will want more. However beneficial credit cards can be, even with their cashback offers, not using your credit card properly can put you in a difficult financial situation. Read on to learn about the pitfalls of credit card use and how to overcome them.
What Are the Dangers of Using Credit Cards?
Below, we outline the dangers to be mindful of while using credit cards for your expenses online and in person.
Ignoring the fine print (terms and conditions trap)
Opening a credit card is the same as entering into an agreement or contract to spend money that is not yours and repay the lender later. Thus, there are accompanying terms and conditions that you must read, understand, and comply with to enjoy using the credit card. Failure to read the fine print will leave you ignorant of what is important and required to avoid the pitfalls of the credit card. Examples of such traps include not knowing the:
- meanings of some “confusing” terms in the agreement;
- the expiry date of the 0% introductory APR;
- fee for late payment;
- categories of purchases that bring cashback and other rewards;
- process of redeeming your credit card rewards.
Fees and rates can accumulate
Some credit cards charge only annual fees, while others require the users to pay several fees, which can include foreign transaction fees and late-payment fees. Also, the annual percentage rate (APR) or interest charges on the card are worth considering, even if you have a 0% interest credit card.
Failure to evaluate all of the applicable fees and rates before opening a credit card can put you in danger. The reason is that these costs can add up and become very high and difficult to pay on time.
Temptation to overspend
Using a credit card can make you feel like you have access to free money and therefore lose your self-control. It can tempt you to spend beyond what you need or can afford to pay. Overspending is not good; even when you have cash, you should limit your expenses.
Ending up in credit card debt or bankruptcy
Failure to control your spending while using a credit card can lead you into debt as you begin to struggle to pay your balance. And when your debt continues to grow and becomes too high, you are likely to experience bankruptcy, which will hurt your credit score. Hence, it helps to have a personal budget and follow the plan.
Damage to your credit
Your credit score can be severely impacted if you make credit card mistakes, such as late payments or missing payments entirely. Even seemingly harmless actions like creating new accounts, cancelling an open credit card account, or securing a balance transfer may raise red flags for creditors, employers, and other parties who could review your credit report.
Lack of peace of mind
You will not have to be concerned about late penalties, interest rates, yearly fees, or any other credit card cost if you do not owe a card issuer or credit facility provider. The best way to reward yourself is to save up for whatever you need and get it when you can actually afford it. It will be like rewarding yourself twice because of the peace of mind that comes with not financing that item through debt.
The Right Way to Use Credit Cards
Credit cards are meant to be used responsibly; otherwise, they will do more harm than good to the credit scores of the cardholders. Therefore, it is important and helpful to think through every purchase decision before using your credit card.
The following are our tips for making the right use of your credit cards:
Make timely payments
The best way to avoid paying late fees on your credit card is to make timely payments. When you miss a payment or send it late, it has a negative impact on your credit score. Also, keep in mind that 35% of your FICO score is determined by your payment history. So, making timely payments every month will help you keep your history on a good track.
Make full payments
The ideal scenario is to pay off your credit card balance in full each month, if at all feasible. You will also save money on interest rates by doing this. If you are unable to pay off the debt on your credit card, make the largest payment you can to reduce interest costs.
Use some, not all, of your credit
Your credit utilisation ratio, which refers to the amount of credit you are using at any given time, has an impact on your credit score. That is because it makes up 30% of your score on FICO and carries other significant weights on other rating systems. As a result, not using your entire available balance can help you keep your credit utilisation ratio low and your credit score high.
Refrain from closing your accounts
Having old accounts active for a longer period of time is good for your credit since the duration of your credit history accounts for 15% of your FICO Score. So, instead of calling your credit card provider to cancel your old account, for the sake of your credit score, keep it active and use it periodically.
What Are the Benefits of Credit Cards?
Despite the pitfalls we have outlined in this article, credit cards offer substantial benefits when used to pay for purchases online or in person. If they were that bad, the issuing of credit cards would not be a legitimate business. So, do not think that you need to avoid them; instead, use them properly for your necessary spending by following the pieces of advice we have provided.
Now the following are the advantages of using credit cards:
- Convenience: Your financial life can get easier when you use the right credit card and manage your debt properly, especially with prompt payments. Credit cards are like instant loans that keep you going when your cash balance is too low.
- Rewards: Many credit cards offer attractive perks that make your spending easier and more rewarding. If you travel often, you should get a travel credit card. But if you often spend on groceries and entertainment, then get a cashback credit card.
- Credit: Spending on a credit card helps you build credit. It raises your credit score when you use it responsibly.
- Safety: Credit cards are generally safer to use than debit cards, whether they are for personal or small business purposes. Also, in the case of a fraudulent transaction or stolen credit card purchases, the original cardholder is not held responsible for the charges if the credit card offers zero liability, as most do. In such a case, the bank or card issuer will pay for it.
- Security: Credit cards have high layers of security, which include PINs, Card Verification Value (CVV), two-factor authentication, card lock, fraud alert, and instant spending notification. They also come with transaction limits, making them more secure than most debit cards that are linked to checking or savings accounts.
When using a credit card, it is important to avoid making the common mistakes that people make with seemingly "free" money. You can learn about them here.
No, it is not! While it is OK to use your credit card for everyday expenses so as to earn rewards or build a credit history, you should not use it for just anything and every payment. Only use your credit cards for expenses you can afford to pay back. Otherwise, you may end up hurting your credit.
Your credit score is not hurt when you do not use your credit card. But the risk involved is that your issuer may decide to close your account following its inactive status, and that will result in a lowering of your credit score as it affects your overall available credit. Read this post for more information.
The biggest problem involved in using a credit card is the risk of hurting your credit score. If you do not use it properly, a tool that is supposed to help you build credit may end up making you lose it.
No, typically, credit cards are meant to do you more good than harm. The reason why some people think they are very harmful is that they abuse them. It is being disorganised and unable to stick with a budget or use credit properly that leads to the mismanagement of funds from credit cards, hurts your credit score, and leaves you unhappy.
Credit cards are useful financial instruments because of the ease, security, and benefits they provide, but before using one, think about the dangers. Credit cards can make life easier and be a useful method to establish credit if you manage them appropriately, such as by only spending what you can reasonably afford to pay off. Similar to personal loans, credit works effectively when debts are paid in full each month, but it may go horribly wrong if not handled properly.