PROS AND CONS OF CREDIT CARDS

TO USE OR NOT USE CREDIT CARDS?

Many people have very strong opinions on why you should or should not use credit cards.  For example, Dave Ramsey definitely does not agree to use credit cards for any reason!  I do use credit cards, but I definitely see the risks involved in using them. It does require some thought to make your own personal decision on using them or not.  So, today I just wanted to talk about some of the pros and cons of using credit cards. I will provide some things to consider in making your decision to use them or not.

PROS OF CREDIT CARDS

You have more protection if your credit card number gets stolen, versus if your debit card number gets stolen. If someone makes fraudulent purchases using your debit card, you will most likely have those funds made unavailable for use while the bank completes the dispute process. When there is a fraudulent charge on a credit card, you are not at risk of your cash being held up.

By using a credit card and regularly paying it each month can help you build a good credit score, if that is something that you are interested in for the purchase of a home, refinance of a home, or purchase of a car. By having a really good credit score, you will be eligible to receive the best rates on these types of loans.

You can earn rewards on your purchases, in the form of cashback, travel points, and many other options. I prefer cash back so that I can do what I want with it, but it’s a personal choice. Most importantly if you are using a card for the rewards, it’s really important to make sure you pay it in full each month so that you do not end up costing yourself more in interest than you received in rewards. Many credit cards offer expense tracking tools that can help you in reviewing your expenses compared to your budget.

CONS OF CREDIT CARDS

Credit cards can be very tempting when you see these large available balances to spend.  It can become easy to justify being able to pay it off next month until something else comes up next month that you need that money for! If your payment is not made timely and in full, you will incur interest charges, often at pretty high rates.

Making a purchase with a credit card can sometimes cause you to incur additional fees. So, just make sure to be aware.  While this is not very common, it does happen. For example, once when making my property tax payment to the town I live in I thought it would be a great idea to pay with my credit card so I could get all of those cashback rewards on the large tax payment.

It turned out the town charged an additional % fee on top of the tax payment for using a credit card. While it was disclosed, I didn’t take my time and make sure to properly calculate what the extra charge was going to cost me. I honestly don’t remember the exact numbers. I was annoyed at myself because the cashback did not exceed the extra charges I paid for using the card. So, just be sure to look for any additional fees you may be charged for using a credit card.  This is more common with payments to government agencies and schools.

0% interest plans offered on store cards.

These are only zero % interest if you pay the purchase in full before the offer expires. If you do not pay the balance in full before the promotion ends, you will get charged interest for the entire amount of time that has passed. When other things come up, as they often do, and you are unable to make these payments you could end up spending a lot more on your purchase than you planned to.

0% interest balance transfers

If you find yourself in a position where you have accumulated credit card debt that you are trying to pay off, a 0% balance transfer offer can look very appealing. Make sure you do the math before making a decision to do a transfer.  I have never seen one of these offers that don’t charge an upfront flat % fee of the amount that you are transferring. If that fee will outweigh the amount of interest, you will be saving, it’s not worth it.

CASH ADVANCES

Cash advances usually incur an upfront fee. Also, until you pay them back you are usually charged a much higher interest rate than regular purchases.

THINGS TO CONSIDER IN MAKING YOUR DECISION TO USE OR NOT

How disciplined are you in tracking your spending? You want to ensure that you can pay your credit card payment in full each month. Do you give in to temptation easily?  Be honest with yourself. Do you have enough saved for an emergency to eliminate the temptation of using the credit card for “emergencies”? It’s very important to do all you can to work on saving up an emergency fund.

Emergencies unfortunately always come up. Using a credit card for emergencies can lead to having a running balance that you are always trying to pay off. This can end up costing you lots of interest and having the stress of carrying the debt. It is very important to know that you will be able to treat the purchases you make on your credit card as if the money was coming out of your checking account immediately.  You should no longer consider the cash equal to the amount of credit card purchase you made as being available for anything else. This requires frequent tracking of your credit card purchases. If you wait until the bill comes to see what you owe you could be in for a big surprise!

Thanks so much for checking in! If you would like to hear the podcast version of this topic to check out Lola’s Frugal Life Podcast! Also, be sure to check out my other blog posts on this site!

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