The Pros and Cons of Owning Credit Cards

Written By: Indojaa Sathiyaseelan

We see a large share of our clients with credit card debt when it comes to repairing credit. The cause usually comes from not correctly managing funds, making excessive purchases on credit or the lack of information credit card companies provide their clients. Our certified credit repair consultants realize that credit cards can be a great resource in your wallet. However, they also can be daunting if not used correctly. In this blog, we will cover the advantages and disadvantages of owning a credit card.

Advantages Builds Credit

Owning and using a credit card allows you to build credit! Building credit is essential because it indicates your credibility when it comes to how you manage your finances. Having a credit score in good standing shows lenders how responsible you are when making payments. So when you want to make large-scale purchases like a car or home, lenders from these institutions will review your credit history and create a payment plan based on your credit score. The higher your credit score is, the more likely you will pay at a low-interest rate. So when you are responsible with your credit card by making payments on time and paying the statement balance in full, you will have a good credit score which will allow you to make large purchases with ease.

Convenience

Credit cards are accepted worldwide! Specifically Visa and Mastercards. It is easier and safer to use credit cards as a source of spending than debit cards when travelling. Debit cards work in some countries but not all. Additionally, there are risks to using debit cards in foreign countries. Suppose you travel to a country without telling your bank, and you use your debit card to make a purchase. Your debit card would instantly be frozen, putting you in a stressful situation where you cannot access your funds in a foreign country. Also, when you use your debit card when travelling, you are putting your finances at risk of pin pad fraud or identity theft, which is a common occurrence worldwide.

By using credit cards as a source of payment in foreign countries, you are protecting your assets! If your credit card is stolen or subject to fraud, credit companies will insure any losses, meaning you and your finances are protected!

Purchase Protection

As previously mentioned, if your credit card is subject to fraud, credit companies will insure any losses due to purchase protection. Purchase protection allows cardholders to file a claim with their credit issuer to receive a replacement, repair, or reimbursement for any eligible stolen or damaged items.

Major credit card companies like American Express, Mastercard, and Visa, implement different policies under purchase protection. That is why it is crucial to know your specific credit institution’s policies before filing for a claim. For example, Mastercard has a maximum payout limit up to $1000, whereas Visa has a maximum limit of $10,000 for specific cards. Ensure to know the purchase protection policies for your particular credit card provider to receive the most out of the benefits.

Overall, credit card companies will dispute any fraudulent activities because losses affect the institution and not your finances. In comparison, fraudulent activities on your debit card will result in a lengthy process, and investigation and losses affect your personal finances!

Disadvantages Spending Impulse

Knowing how to use a credit card responsibly is easier said than done. Since credit cards are aside from your personal finances, it is easy to overuse them and accumulate a high bill. That is why it is essential to use credit cards for priorities like bills instead of a shopping spree.

The more you use your credit card, the higher your credit utilization will be, which will affect your credit score. When lenders see that you have a high credit utilization, they will assume that you are dependent on your credit which will cause them to see you as a risky borrower. To overcome your temptation to use credit cards, avoid making everyday purchases by recognizing your priorities.

Interest Charges

Some people make the mistake of only paying the minimum when they receive their credit card statement. The problem with only paying the minimum is that you are not paying the statement balances, which carry over to the next bill along with interest charges.

Suppose you purchase an item for $25. If you don’t pay the entire amount before the next billing cycle, you face paying interest charges on top of the $25 you spent. Meaning you are spending more money on the item than you would have if you paid the entire amount before the end of the billing cycle. Interest charges can be a nuisance, especially if you are only paying the minimum. However, you can avoid interest charges if you pay statement balances in full.

Fees

While cash advances and rewards credit cards sound intriguing, these benefits come with fees. Cash advances are when you withdraw money from your credit card at a bank or ATM. But when you make cash advances, you will encounter cash advance fees. Cash advance fees are what the credit card company charges you for making a cash advance. Credit companies will charge you a flat fee or a percentage of the transaction, whatever is more outstanding. On top of cash advance fees, you will also have to pay interest on the transaction too.

While all credit cards have cash advance fees, reward credit cards have annual credit card fees. Reward cards allow you to earn cashback, points, or miles that encourage you to use credit cards over cash or debit cards. However, these rewards come with an annual fee, which is a fee that is charged every year in exchange for owning a rewards card. Annual fees can range from $95 to $500. Although, some cards may waiver the yearly fee for the first year of owning the card. There are ways to avoid annual credit card fees, like opening a premium bank account that offers credit card annual fee waivers and asking your bank to waive the annual fees. However, if you own a rewards credit card, you will eventually pay for annual fees.

For these reasons, it is crucial to check out the fees, rates, and terms of a credit card before applying. And if you already have a credit card, look at your billing statement or credit card agreement.

Owning a credit card is an inevitable rite of passage into adulthood. That is why it is important to know the pros and cons to prepare yourself for the responsibilities to come. With the disadvantages we listed, don’t let them discourage you from owning a credit card. The mentioned cons are only effective if you don’t use your credit card wisely. Before applying to any credit card, read the rates and terms to ensure you apply for a credit card that compliments your lifestyle. At Credit360, we encourage you to look at the advantages of owning a credit card as it will help you achieve the life you deserve.

Originally published at https://www.credit360.ca on October 12, 2021.