Credit cards have a bad reputation, as least to hear most financial planners tell it. Ironically, U.S. consumers currently hold more than 770 million credit cards in their collective wallets. That’s a lot of plastic, and is a clear indication that credit cards are extremely popular among consumers. Many people, unfortunately, don’t handle credit well. They overspend, get into serious debt and generally mishandle the amount of credit they have access to.
Some people blame credit card companies for this sad state of affairs but some amount of the fault has to be laid at the doorstep of the consumers who abuse their little plastic rectangles. Yes, there are dozens of “credit traps” that are easy to fall into, but there’s also a good side to using credit cards. Here’s a summary of the pitfalls and the advantages of credit cards:
The Many Traps in the World of Credit Cards
The biggest trap is the temptation to over-spend. Something like two-thirds of all credit card users say they are habitual over-spenders. Whether that is the fault of the card company’s marketing or not makes no difference. It’s a fact of credit card use that you will be powerfully tempted to spend money you otherwise would not spend.
Getting in over your head and being able to only make the minimum payments is perhaps the worst of all credit card scenarios. When you do that, you’re virtually a prisoner of the card forever. Minimum payments are structured to have you paying off the card as the slowest rate possible.
Overusing credit cards can lead to serious, long-term damage to your credit. Whether you end up having to file bankruptcy or not, your credit score will suffer if you use too much of our credit limit on a card. Lenders are very interested in how well you use the cards you have. If you are near the limit on several cards, you will likely be unable to get a home loan or even an auto loan.
What about the Advantages?
There are advantages for people who use credit responsibly. We don’t all have a net worth like Steph Curry, as such, credit cards allow you to have a safety cushion for short-term emergencies. If it takes you several days or weeks to free up money in an investment account, or to borrow from a 401k, then a credit card can be used to fill in the gap.
In general, cards allow you to have a traceable, verifiable paper trail of every transaction. You’ll also have access to “buyer protection” if you are unhappy with a retail transaction. It’s much easier to get a refund on a credit purchase than on a cash purchase, in most cases.
When you do use card responsibly it’s possible to improve your credit score because most card companies report to at least one agency. Some cards report to all the agencies. You’ll often be able to earn significant cash-back rewards if you regularly use your credit cards for travel and hotels. For some consumers, credit cards are the most convenient way to do business.
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