Pros and Cons of Credit Cards

Credit cards have a bit of an identity crisis in our society.  In some circles they are vilified, along with the companies that offer them.  Others see them as a useful tool for financing short-term loans to fund projects or small emergencies.  I personally fall somewhere in the middle, recognizing that there are both pros and cons to using credit cards.

Credit Card Can Be Useful Tools

Grace periods allow consumers to float money.  As long as you submit payment in full well in advance of the due date it is possible to borrow money without interest on credit cards for a short time. However, this can be a dangerous game.  One missed payment can raise your interest rate, cause late fees to be assessed, and cause irreparable harm to your credit file for the next several years.

Credit cards offer reward and rebate programs. I doubt anyone has ever become rich off credit card awards, but if you run purchases you would make otherwise through a card with cash back bonus awards it can really add up!  I used to work with someone who ran all utilities, gasoline purchases and recurring subscriptions through their Discover Card and earned a couple hundred dollars a year in cash back awards.  That’s a pretty nice Christmas bonus.

Credit cards offer added security over carrying cash.  We have been diligently saving for Christmas shopping all year long, and managed to accumulate enough to enjoy the holiday season (and give a little away as well).  Rather than cashing out our Christmas fund and carrying several hundred dollars in cash around the stores, we simply charged it and will pay off the bill from our savings account when it arrives next month.

Potential Dangers of Credit Cards

People are often introduced to credit cards at a young age. Unfortunately, credit card companies have made a habit of marketing to younger and younger ages over time.  The problem with young people owning a credit card is that they rarely have enough income to cover the available credit, and if they run up the card they get sucked into the minimum payment trap for life.

When using credit cards, there is no emotional separation from money. Do you remember the last time you paid for something with a $100 bill?  I do.  It was painful.  As Uncle Benjamin left my hand I could feel a twinge of pain that I wouldn’t have felt swiping plastic.  It is this emotional pain that keeps us grounded, fiscally.

Banks offer overly generous credit lines.  Ever noticed how credit card companies increase your credit line if you approach being maxed out.  And if you pay off your card, what do they do?  Increase your credit line.  It isn’t uncommon for twenty year-olds to have $10,000 credit limits on $20,000 annual incomes.  That just doesn’t pass the common sense test.

Credit cards increase the chance of identity theft.  Credit card numbers floating around are tied to your social security number and credit profile in a database maintained at every institution you do business with, and at all the large credit reporting agencies.  Scary, isn’t it?  Protect your credit card number and the physical card itself by being vigilant with receipts, statements and online purchases.  Review statements for any unusual activity, and keep your bank’s contact information handy in case you lose your card.

If you are like me, and went a little overboard with credit cards at an early age, you might want to consider a low-interest consolidation loan or consider this 24 month promotional balance transfer offer from Discover® More Card to group your debt at a lower rate.

If you go this route, cancel all but one credit card, and consider lowering the credit line down to a manageable level.  If you don’t, you could wind up with a consolidation loan and more credit card debt.

Comments

  1. Great approach to a subject that raises so many passions. I use credit cards responsibly. I love the points. I’ve got a couple cards: One that helps me save money for my son’s college down the road, and one that helps me get a free flight to see my husband’s family once a year. It’s great — if you have the discipline to spend only what you have and pay it off every month so that you aren’t destroying the value of the rewards with interest.

  2. The cash back reward on my credit card covers my Christmas costs. By using the card with the highest cash rebate (but no annual fee!) and charging as much as I can (even household bills) I pay it off each month and reap about $500 per year.

  3. I love the good vs. bad arguments that pop up when it comes to credit cards, it’s just funny how passionate people are on both sides, especially the anti-card crews. Me? I’m on the “credit cards are good is you’re responsible and can show a little restraint” side.

  4. i actually just discovered our rewards points last night (it’s my husband’s card, he never bothered to find out what they were , haha) . these had been adding up for several YEARS- we took the cash (rather than the digital cameras or BOSE stereos) and it made a handsome credit card payment. I think we will actually run the utilities and such through our cards when we are out of debt just to rack up the points and get things like the camera (I was seriously tempted by the cameras, but debt relief comes first) for free by paying our balance in full every month :)

  5. Don’t see how handing a physical bill should be any more ‘emotionally painful’ than charging something. The bill is a just a piece of paper which has no intrinsic value. It’s not like you’re handing over pieces of gold. If you look at the history of paper money, you will find that it originated as credit slips for coins.

    Where did the $100 bill come from? Because you can get it just as easily from a credit card (cash advance at ATM, or from bank teller) as you can from a checking/savings account (also at at a bank or ATM!) Financial maturity comes with not what sort of payment you are giving, but recognizing the amounts and how they factor into your overall budget and spending plan.

    What is your feeling on debit cards?

  6. @Frugal Bachelor: Thanks for your comments. I think it has more to do with the visual idea of being a bill down in your wallet, rather than the intrisic value of the bill itself. I agree $100 is a $100, but separating yourself from that crisp $100 bill can be harder to do than swiping plastic.

    When you swipe plastic you still put it back in your wallet when the transaction is complete. When you hand over a paper bill the store keeps it, and might give you a little change back in return.

    I like debit cards, and use them myself for some purchases when using cash is more trouble. However, I still believe spending cash requires the maximum discipline and is ideal for people trying to get spending under control.

  7. Interesting that you posted this when you did–my husband & I (we are both 24–not that it matters) were filing papers on Sunday night when we ran across our credit card statements. We have two cards–both MilesOne cards from Capital One that we use for groceries & gas (& get double points b/c of our good record)…we pay each off @ the end of the month {there are two because of our living situation: I’m still in school & all school-related purchases go on one}.

    ANYWAY…after seeing a few “holiday” commercials for other cards, I realized that we may NOT be getting the best deal through the MilesOne card. It takes an insane amount of miles (like 25,000) to purchase a no-restrictions airline ticket from your airline of choice valued at *only* $250 (or something like that). In other words, I’ve had my credit card since age 18…and after paying it off each month & always having a zero balance, I STILL only have 23,000-something miles (5,000 of which came as a bonus w/ my first purchase).

    So…do you have any recommendations on how to get the best “deal” for credit card bonuses? And which credit cards seems to offer that? American Express? Discover? Visa? Any websites you know of for comparison? And customer service ratings?

    Thanks :) Your blog is awesome ;)

  8. I personally like the Discover More Card (it is linked in the article above). It gives a full 5% Cashback Bonus in categories like travel, gas, groceries, and restaurants and 1% on everything else. It has no annual fee, and is offering a 0% balance transfer rate for 12 months, and 0% APR on purchases for 6 months (with excellent credit).

    For a source on card reviews, reward programs, etc. you can’t go wrong with Consumer Reports. http://www.consumerreports.org/cro/money/credit-loan/credit-cards/cash-back-cards/reward-cards/0707_the-best-cash-back-credit-cards_ov.htm

  9. I definitely fall in the group where if you can be responsible with the cards, by all means use them to pay your bills and go shopping. They are more convenient and many times much faster than using cash. It is so disheartening to watch a poor little high school grad cashier try to make change for you when she can barely add denominations.

    Ha, floating money on credit cards always reminds me of that knife game I’ve seen on movies from the 80′s. You know, the one where you see how quickly you can stab the table between your spread out fingers. (See the movie Aliens.) It looks really cool until you mess up just once.

    The rewards programs I’ve seen (and have) don’t give the option of cash. It is usually just crappy stuff that I wouldn’t even spend someone else’s money on.

    The emotional separation between plastic and paper money is all in your head. At some point you had to change the way you think about spending every month anyway. It’s not that hard of a leap to get the mindset of spending is spending whether it is on a card or not.

    Overly generous credit lines? It doesn’t matter if you are responsible with them anyway. It wouldn’t make much difference to me if I had $1000 or $100,000 in limits. I still only use them to get what I have budgeted for anyway. In an emergency though, the higher limits can give one a little piece of mind. (Example: repairing house damage before the insurance company can cut a check — when living in one of the hurricane states, it can make a difference)

    I go through this all the time, but checks are more easily stolen than credit cards. It just seems that check fraud has taken a backseat to credit card fraud since the advent of the internet and credit card fraud has gotten much more publicity. If you make sure to keep up on your credit card activity (and credit report), it is pretty easy to stop thieves cold if they start charging to your card. Try doing that with your checkbook.

  10. I also think credit card companies should not be allowed to set up kiosks on college campuses. That is a prime place for them to get new customers by giving away free things. As you said, most of the time they do not have the income to cover it. Bad way to start having credit.

  11. Not that I want to tout any credit cards, but I have the Citi Driver’s Edge credit card. The Discover More card has schedules of what purchases get the 5%, like gas is only a 3 month period of the year. Not to fond of that.

    With the Driver’s Edge you get 6% on gas/groceries/drugstores anytime for the first 12 months and 3% after that, plus 1% on anything else. PLUS, you get .01 per mile driven on your car (you can only enroll one car per card). That basically is a free oil change every 3,000 miles! I pay off my balance each month and claim the rewards for free auto maintenance!

    I agree though, I have a $25,000 limit on one card since I was 23. I never have a balance over 1,000 that isn’t paid off, but they keep increasing…scary.

  12. Credit cards are purse sized debt machines, if you shop around for a sweet card that offers cash back or points etc and you are well off enough and have the right mindset to dealing with money then a credit card is a great idea, but one slip up or lapse in concentration when using one can put you in a bad place. I think store cards are the worst as they have so many hidden charges and jacked up interest rates.

  13. I think credit cards are dangerous. They tempt way too many people into overextending themselves financially. The rewards they offer are simply marketing tactics to seduce you into going into debt.

    A debit card offers most of the same conveniences without the majority of the pitfalls. Why take the risk?

  14. Here is another feature to add to the list:

    “Credit cards are the ultimate symbol of an instant gratification economy built on debt-driven consumption.”

    You can put this on either the good list or bad list, depending on your feelings towards plastic.

  15. I’m going to be “old school” about this debate, namely always opt for cash if you can! The simple reason is that you will spend less (period). And, often, you will be able to barter and negotiate a better deals on things (think appliances, air conditioners, any electronic, etc.). I understand there are reward credit cards, but think about what the credit card companies are trying to have you do – they’re trying to get you to spend!

    http://www.scordo.com/blog/blog – a practical living blog

  16. I’m a big fan of cash. That being said, I’m also a sadistic wench with delusions of grandeur (which is why nobody really wants me to run for public office although sometimes people say they do). Generally I don’t go out of my way to tell other people I’m convinced I’m secretly the Empress of Everything (people do get locked up in padded rooms for that). But when it comes to credit card issuers, it’s great fun to act like a self-appointed agent of Karma.

    Having seen how much trouble unscrupulous credit card companies can create by giving large credit limits to people with obvious control problems, I LOVE to abuse credit card companies. I charge gas, groceries, and everything else I can think of, then pay the bill off at the end of the month. Besides being reimbursed for the money they so naively lent me for free, the card companies get NIL. NADA. Sweet diddly-ding. In fact, because the card companies have to pay for the postage to send me the bills, it would actually cost them just to do business with me, even if I *weren’t* dinging them for free plane flights. This is not a sensible business plan. They lose money on me every year. You’d think they would eventually do the math and decide to stop… but they don’t! Instead, I get at least two or three letters a week from lenders who you’d *think* would be capable of reading my credit history and grokking that I never pay a dime in credit card interest or late fees. These letters say: “Oh, your royal Squeakfulness, exploit us next PLEASE!!!” (Well, it doesn’t literally say that, the literal word is “pre-approved”, but you get the picture). Plus, “pre-approved” applications keep showing up at the Chateau Squeak addressed to people who don’t exist. How stupid can lenders GET with their shareholders’ money? I’ve tried writing them letters explaining the problems with their logic, and then elaborating on the mental deficiencies that allow their logic problems to continue to exist, but it doesn’t seem to be working. So I continue with Operation Fleece-The-Sheeple.

    I should probably feel guilty about being part of the reason the card-issuing banks are in such bad shape, I mean we’re in the middle of the “financial meltdown” that will later be remembered as the Great Wake-Up Call of 2008. But I don’t feel bad at all, especially when I’m sipping on a Martini, stretched out in a first-class seat on a flight the credit card company bought me, toasting my decision to not buy stock in the companies dumb enough to give me that plane ticket, and watching my ego and sense of entitlement expand even more. That situation feels really, really good. In fact first class is pretty much unmitigated bliss, because airlines really know how to treat an Empress Of Everything. So it’s hard not to feel at least mildly amused by the whole situation.

    Bad Squeaky, no biscuit.

  17. Credit card use and fees should be introduced into schools and colleges before any kid ever really gets a hand on credit cards. I was lucky to have my parents teach me more about them before I was on my own. Most people aren’t like that. They need to be educated on how to properly use them and potential damages of over using.

  18. @squeaky:Actually the credit card company makes money every time you use your card. The store must pay visa, mastercard, etc. merchant fees for every credit card transaction. So while you might not be paying any interest, the credit card is very very happy that you continue to use them…

  19. The fees are usually a percentage of the purchase price also so the more you spend the more they get. They probably love you.

  20. The “there is no emotional separation from money” is crucial. Study after study has shown that people spend more when shopping with a credit card than they would if shopping with cash. Quite often people will spend 30% or more if using a credit card than someone who is not using a credit card. A credit card, without proper discipline and most people don’t have the necessary fiscal fortitude, also encourages impulse buying and discourages shopping around for a better deal.

    As for rewards, I don’t worry about those too much. I buy my gas at my grocery store and they give me back a coupons to use in the grocery store when shopping for food (when I fill up, I usually get two dollars or more back). It is enough to make it worthwhile.

  21. I have earned about $400 this year on cash back incentives with a Speedway Mastercard, and have another $100 I can turn in now!
    I have 3 cards to do this: Speedy Rewards Card, Chase Speedway Mastercard, and AAA 4% discount Speedway Gift Card.
    I receive 4% back on my gift card when I put money on it. IE, I tell them I want to put a $100 on it, it only cost me $96. But the card has $100 on it. I use my Speedway Mastercard and earn points thru them, 4000. You always use your Speedy Rewards Card anytime you make a purchase, and when you put $100 on a gift card, they give you 2000 points. Plus, I use my Mastercard in town for all of my purchases (MUST pay off each month or your not doing any good) and they give me 10 points for every dollar.
    It only takes 66,000 points to get back $100. Usually hit that about every other month. Here’s the kicker…I print out my $100 cash back ticket…put it on my 4% gift card and yep, you guessed it, they put $100 on my gift card and give me back $4. So actually, I get $104 each time I reach 66,000 points!

  22. My sister charges everything and has gone to Europe with her mile credits 4 or 5 times at least. I tried it for about two months, in some ways it was handy as I only wrote one check to cover all my expenses—but it was a whopper! I just couldn’t handle writing a check for a couple thousand dollars every month. Granted, I spent that much in multiple little checks, but the little checks were just easier for me to do. My husband and I got into credit card debt in the past and it took a long time to pay off and get ourselves back in the game. I guesss that’s why I just get anxious seeing a high credit card balance even though I paid it in full every month, I just became anxious that one month I wouldn’t have the money and the whole thing would snowball again.

  23. @Rob:

    That’s actually good news; I was starting to almost feel guilty there for a second. Thanks for helping me continue to rationalize my behavior. :-)

    The fee credit card companies charge merchants is just a couple percentage points, is it not? I’m not sure that it would cover the price of a plane ticket, the stamps and paper, and the employees and infrastructure to do things like processing payments. I wonder how much of their money they really make from finance charges, and whether they “need” to raise rates so high to stay in business.

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