We now live in a world where most people solely use credit cards, cash is a blast from the past. Check out these credit card pros and cons before making the leap.
Are you at a point where you are considering your first credit card? Or do you have a relative, spouse, child, or some sort of relation who is considering a credit card? I will never be a person that says they are a bad thing, but you certainly must understand the credit card pros and cons before you move forward.
As with anything, when used properly, a credit card can be an extremely convenient tool that actually pays you back over time if you play the game properly. They can also set you back years and years if you don’t know what you are doing.
A credit card is no different than any other financial decision you make, the key is doing your homework first. Find a card that works best for you, understand every detail of the card, and always stick to your budget.
Keep reading for all the best credit card pros and cons to evaluate before making a decision.
Credit Card Cons:
Short-Term Credit Hit – For every credit card you apply for, your credit report will receive a hit for the short term. If you are in a situation where you will be applying for a loan soon, you will want to be sure to wait and apply after.
This isn’t a long-term issue so it isn’t something that should deter you from getting a credit card, just something that you should be aware of.
Deferred Interest – One of the biggest reasons some folks want a credit card is because of the zero percent interest options that can come with certain cards. Please beware, these low or zero interest cards are only for a short period of time.
In fact, after the no-interest period is over, you will be retroactive to the standard 17 to 24 percent interest rates. That means if you have any balance remaining on the card once that rate is up (typically 12 months), you not only get interest rates for the current month, it’s like the zero percent was never there and the interest applies retroactively for your balance.
High-Interest Rates – This one ties in closely to the above. Certain cards will have periods of low or no interest rates, but after that, the interest rate on a standard credit card is far higher than your standard loan.
Car loans can be anywhere from 3 to 7 percent, and mortgage rates are right around there as well. Both have moved higher in the last few months with the Federal Reserve increasing rates, but they are still nowhere near the 17 percent (or higher) interest rates offered by a credit card company.
If you are desperate for some cash to make a purchase and are willing to pay that type of interest rate, I can guarantee you a credit card is not for you at the moment.
Fees – When looking at credit card pros and cons, fees are one of the double-edged swords. It feels like every single card has some sort of fee, so you must make sure to take note of that. There is nothing worse than an unexpected charge each year just for having the card.
However, you typically get some sort of reward for the fee. Depending on the card and the perks of the card, it can sometimes outweigh the costs.
Another dangerous game to get into with credit cards is transferring balances. If you have a solid strategy and a long-term plan to pay things off, you can continue to move from one zero percent interest card to another. KEEP IN MIND: if you just go on a shopping spree and don’t pay things off, you’ll eventually get declined a new card.
Some people move balances from card to card for larger purposes that don’t always qualify for a loan. Examples are furniture for a house or even a semester of college. You can take out loans for these things, but some choose the credit card route.
If you plan to transfer balances, just make sure you understand that cost. It will most likely be cheaper than a 20 percent interest rate hit, but some cards charge you based on a percentage of the transfer amount and it can be costly.
Fraud and Fine Print Details – Knock on wood, I have yet to have a bad experience with credit fraud. I am a person that checks my statement often, but in the one or two situations where I have been compromised, I have always been made whole.
As with any major contract, the fine print at the bottom can be tricky and difficult to understand as well. Just make sure you understand how the interest rates work and the fees of the card. You don’t want to sign up for a credit card just to realize it won’t work for you.
Overspending – It can’t be overstated that the most important topic was saved for last when it comes to credit card pros and cons. By far, the biggest con of opening a credit card is the temptation to overspend and the debt that can pile up.
It truly is silly to spend cash when you can use a credit card and earn some sort of reward for your spending. But at the end of the day, if you can’t manage to spend less money than you have to pay off the balance each month, a credit card just isn’t meant for you.
Often times, the max spending limit far exceeds what you should be spending in a month and it becomes easy to buy things based on your wants, rather than your needs. We all know at least one person that has racked up thousands of dollars of credit card debt and has legitimately changed their life.
Overspending can not only lead to a life-long debt issue but some folks are also led to filing bankruptcy, or even worse, losing their home because they can’t manage the money. As you’ll see in my next section, there are a ton of pros to having a credit card and I highly recommend it, but if you have any doubts that you won’t be able to not overspend, please don’t get a credit card.
Credit Card Pros:
Budgeting – When looking at credit card pros and cons, sometimes it’s the little things that mean the most. Something that is very small but is a huge benefit for me is the download and breakout of the credit card statement online.
For each card that I have (I have two, would not typically recommend more than that, but everyone is different), I can download the statement each month and it not only has each charge, but it also categorizes the charge, which then updates my budget. So, within three clicks and a few formatting changes, I have all my charges for the month, and they are categorized by where and how the money was spent.
I will die on the mountain top screaming that if you don’t have a budget, you need one. And using a credit card for a vast majority of your purchases can be a huge pro to easily updating a budget on a monthly basis.
Account Holds for Travel – I have to admit, I’ve never been in a situation where I didn’t have a credit card to use for a hotel, rental car, or flight, but I can only imagine having to give the front desk cash for incidentals.
Having a pending charge on a credit card is absolutely no risk to you, and instead of giving up your money to hold something for you, it’s only tying up your credit line which is a very small risk or factor in the grand scheme of things.
I know when I travel for work, I have seen holds up to 50% of the room cost just in case you destroy the room or something of that nature. Having that cash disposable to you for spending (especially if on vacation) is a huge perk.
Buying Online – Similar to never having to pay cash for incidentals at a hotel, I’ve never been around when shopping online wasn’t big. When I was younger it wasn’t nearly as popular as now, but I remember ordering things from a catalog back then.
You can use several different methods of payment when shopping online. Gift cards and PayPal or Venmo are all popular, but a credit card is still one of the simplest ways to purchase online.
Not only will you earn rewards (discussed below) on your purchases, but you will also get fraud protection from your credit card provider. I don’t want to portray online shopping as dangerous, but there is no doubt that is one of the top ways for your card to be compromised.
Stay diligent in tracking your charges and you will have no issues staying whole.
Grace Period – Another pro of a credit card can be a grace period. Now, I mention this as a positive, but I must share that using the grace period can also lead to overspending and not understanding how to properly utilize a credit card.
A standard card will give you three weeks to make the payment for the last month of purchases. That means you are given more than 50 days of time between purchasing something and making the payment on that. Keep in mind that things that you buy on the back half of your statement date won’t have as long of a grace period.
In a time of buying something large, you can use the grace period to help you coordinate funds to pay for it. Maybe you need a new couch, but you don’t get your tax return for another two weeks. A grace period will allow you to go out and buy the couch, and not have to pay for it until after you receive your tax return.
Again, I can’t overstate this. Be cautious using the grace period and always pay your credit card statement in full. This is a pro that can be utilized every once in a while, but if you are relying on the grace period month in and month out, you are just digging yourself a hole that you can’t get out of.
Rewards – One of the most millennial things I can think of is credit card rewards. Now every one of your favorite brands or travel programs has a credit card that gives out “free” rewards. I put free in quotations because nothing is free. You must spend money on their credit card, and you must pay your bill.
However, if you are utilizing a credit card properly and using it for everyday spending that is already a requirement, you might as well get a reward out of it. For instance, say you like to vacation. You may have an airline credit card or a hotel. Each dollar you spend will give you points toward that airline or hotel, and eventually, you will qualify for a free flight or hotel stay.
Some cards just give a simple percentage back. Whatever you spend on the year you get X percent back in cash. All these programs are similar in nature when it comes to value, but it really depends on what’s important to you when selecting a program.
I’m a great example. I travel a decent amount for work and constantly stay in hotels that I am reimbursed for. Because of that, I have a hotel card that I get even more points for when I stay at that hotel chain. By utilizing a work reimbursement, I typically can earn three to four free nights a year on that card which I use for my family.
When it comes to credit cards, rewards are now king!
Credit Building – No matter what you want to do in life, any time you want to buy something major you will need a loan. In order to qualify for a loan, you will need good credit. Having a credit card and paying it off in full each month is the best way to build and establish your credit.
Even if you only spend $100 or $200 a month on the card and pay it off, that type of activity can quickly help you build up your credit score.
Credit card pros and cons are very serious issues that you strongly need to consider before deciding if a credit card is right for you. I’m in the camp of earning as much as possible on my money and am a firm believer that the pros outweigh the cons.
But as with any financial decision you make, be sure to do your homework before making a decision.