Credit cards make buying things easy, but at a significant cost

Credit cards provide security, convenience, and even rewards based on spending. However, if cardholders don’t manage their cards carefully, they may find themselves facing unwanted consequences like a poor credit score or hidden fees.

If you don’t pay off your credit card balance every month, the interest assessed on your account means you may be paying more than you expect. And if you spend beyond your means, the resulting interest and debt can become significant.

Pros and Cons of Credit Cards

To make the most of your credit cards and maintain a great credit score, it’s essential to understand their pros and cons. Maximize the benefits and minimize unnecessary costs by learning about the advantages and disadvantages of credit.

Advantages

• Instant Purchasing Power – Credit can help with unexpected emergency expenses and give you the flexibility to pay them over time.
• Security – Lose cash, and it’s gone. Lose a credit card, and it can be canceled with no harm done in most circumstances. Also, you need to be prompt about reporting a lost or stolen card to be protected against its unauthorized use.
• Record Keeping – Your credit card statement is an itemized list of your monthly expenditures, which can be helpful when it comes to budgeting.
• Convenience – Credit cards are more widely accepted as a form of payment than checks, and they’re generally faster to use.
• Bill Consolidation – Bills can be paid automatically via credit card, consolidating several payments into a single sum.
• Rewards – Using a credit card with a rewards program may earn you benefits like free travel.

Disadvantages

• The main disadvantage to credit card usage is the potential cost in interest and fees. Wise use of credit means understanding those costs and acting accordingly. Keep track of your spending to ensure that you can repay your credit card bill in full when it is due each month.

It’s important to understand the true cost of credit cards when interest and fees are factored in. Using credit may be less convenient if it means paying more for purchases over time when interest is factored in.

Payment by credit card is quite different from the cash payment methods like cash, check, or debit card. With credit, a promise to pay later is a part of the transaction. With credit cards, credit is provided by a third party (someone other than the seller), the seller receives full payment for the item. The seller must pay money back to the third party who provided the credit. In this way, the person receiving the credit is delaying payment.

Many people use credit to pay for meals at restaurants, even to make small purchases without having to use cash. Because the use of credit is so common, it might appear that credit is unlimited. However, people who do obtain credit are subject to credit limits, meaning that they can only get so much credit.

Get to know these credit cards terms:

1. Annual Fee – The once-a-year cost of owning a credit card. Some credit card providers offer cards with no annual fees.
2. Annual Percentage Rate (APR) – The yearly interest rate charged on outstanding credit card balances.
3. Balance – An amount of money. In personal banking, balance refers to the amount of money in a savings or checking account. In credit, balance refers to the amount of money owed.
4. Credit Line – The maximum dollar amount that can be charged on a specific credit card account.
5. Grace Period – The period of time after a payment deadline when the borrower can pay back the borrowed money without incurring interest or a late fee.
6. Introductory Rate – An interest rate offered by credit card issuers in the initial stages of a loan. These rates are often set much lower than standard rates in order to attract new cardholders. Make sure you know how long the introductory rate will last and what the standard interest rate will be once the introductory period ends.
7. Minimum Payment – The minimum amount of money that you are required to pay on your credit card statement each month in order to keep the account in good standing.
8. Overdraft Protection – A banking service that allows you to link your checking account to your credit card, thereby protecting you from overdraft penalties or bounced checks in the case of insufficient funds.

Credit cards can be a convenient and flexible form of payment, but they have to be used responsibly in order to make the most of your money. Though credit cards allow you to purchase items instantly without using cash, it’s important to use your cards as carefully as you would handle your cash.

References:

1. https://www.practicalmoneyskills.com/learn/credit/credit_basics
2. https://www.econedlink.org/resources/the-costs-of-credit
3. https://www.thebalance.com/the-true-cost-of-credit-cards-1289627
4. https://www.practicalmoneyskills.com/learn