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.