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Month: November 2020

The Pros and Cons of Credit Cards

The Pros and Cons of Credit Cards

There are a number of pros and cons to owning credit cards.

If you use them properly, they can be a beneficial tool in your overall personal finance repertoire.

However, if you misuse them, they can help lead you down the path to financial ruin.

Here are five pros and cons to owning a credit card:

Pros

Convenience: No payment method is easier and quicker than using a credit card. You just swipe the card, sign the receipt, and off you go. No punching in a pin number; no waiting for change; no stopping at an ATM to replenish cash. It’s also one of the safest and easiest ways to buy products online.

Builds Credit History: If you’re young and just out of college and plan one day to purchase a house, you’re going to need to establish a credit history first. Having a credit card and making your payments on time is one of the easiest ways to establish this. Given the stricter underwriting following the housing crash, building a solid consumer credit history early in life is important.

Cash Back and Rewards: Many no-fee credit cards offer users cash back, typically 1% for everyday purchases and between 2-5% for select categories like gas or groceries. While that may not sound like a lot, it can add up quickly and put a few hundred extra dollars in your pocket each year. Credit cards can also be a good way to rack up frequent flyer miles as well for users who like to travel. Store credit cards, meanwhile, like Target’s Redcard, can give shoppers instant discounts each time they use the card at the store.

Security: One of the big benefits of owning a credit card compared to a debit card is security. In the U.S., federal laws limit the liability of the cardholder to $50 if they report that their card was stolen within 60 days of receiving their statement. For debit cards, however, consumers have only two business days to notify their financial institution that it was lost or stolen for their liability to be capped at $50. Otherwise, the cap is $500.

Emergencies: While not ideal, credit cards can be a good source of funds in case of a minor emergency, such as if your car breaks down, if your savings are running low.

Cons

High Interest Rates: If you own a credit card and don’t plan to pay the balance off each month, then you’re going to get hit with pretty high interest rates, sometimes in excess of 20%. That means if you plan to carry a balance, you’ll end up paying a lot more for your purchases than the sticker price.

Easier to Overspend: The convenience of credit cards can occasionally lead to overspending if you’re not mindful. Unlike cash where you only have a certain amount in your wallet, with credit cards you can “almost” unknowingly spend more than you had planned. Adding up the receipts after a day at the mall can sometimes lead to an unpleasant surprise as a result.

Fees: Not every credit card is free, and some reward cards can come with some pretty hefty annual fees. Meanwhile, you can also get hit with fees if you miss a payment.

Identity Theft: It’s not unheard of for thieves to go after credit card information. In July 2005, hackers gained access to TJ Maxx’s computer systems and were able to steal the personal information of 45 million credit card and debit card users.

Debt Can Add Up Quickly: If you’re not going to pay off your credit card bill each month, then the biggest pitfall to owning a credit card is that your debt can quickly escalate. Paying the minimum payment each month and then continuing to charge can be one of the quickest ways to financial ruin.

The Bottom Line

If you plan on paying off your credit card bill each month and are careful not to overspend, then owning a credit card can be financially rewarding.

However, if you start bringing home more stuff each shopping trip and are only paying the minimum amount owned each month, it’s time to stick the plastic in the back of the drawer and only break it out in case of emergency.…