Credit cards allow consumers to purchase goods or services based on credit rather than cash and must be paid back in a timely fashion. Before opening a credit card, consider our list of pros and cons below.
Pros
Build Credit History
Building credit history is a process, but it’s important for your financial health. Having a credit history allows you to take out a loan, finance a car or even buy a house. Establishing a trail shows lenders that you’re able to make payments on a frequent basis. Paying your credit card bills on time will allow you to obtain a strong credit score, apply for items that require credit and receive lower interest rates. Building credit takes time and patience, but it’s worth the wait.
Offer Rewards
Many credit card companies offer an incentive program, such as reward points. Whenever you use a credit card that has this program you will almost always earn at least one point per $1 spent on all purchases, but certain cards will offer more. Reward-based credit card products like cash back are only in favor of those who pay their credit card statements in full every month. To learn more about different reward offerings, check out PFCU’s credit card offerings.
Solid Security Features
Unfortunately, scammers try to think of new ways to access your credit card information or commit identity theft. However, credit card companies are aware of this factor and put features in place to ensure you’re protected against fraud. For example, credit card companies help lower the risk with online or brick-and-mortar shopping by having a secure website and secure credit card readers in store. Additionally, the 3-digit security code on the back of your card and the chip on the front provides solid security when you go to make a purchase. Both of these features help validate your information automatically.
Cons
High Interest Rates
You can incur high interest rates if you do not pay the balance in full and only make the minimum payment on your credit card each month or if you don’t pay off the amount quickly. As a result, this will have a negative impact on your credit score and finances overall.
Causes Debt If You Don’t Keep Up With Payments
Not paying your bill on time can lead to growing debt and a negative score. It’s important to budget and be mindful of when your bill is due. Always pay more than you use, even if it’s just a little. Setting reminders on your calendar or cellphone will help keep you on track of your payments.
Annual Fees
Credit cards may have annual fees in addition to interest on debt. Annual fees are an example of hidden costs, where there is an unexpected payment after the initial cost. By researching and comparing the annual fees of each credit card option, you can minimize the hidden cost.
Can Lead to Bad Spending Habits
Overspending with a credit card can also contribute to increased debt. Don’t treat your credit card like a gift card and swipe irresponsibly. Even if you charge just a little too much on your card one month and then vow to pay it off the next, the balance will still increase at a high interest rate. Since the interest will be added each month, the debt grows. To avoid such a situation, budget and keep track of your spending to help you toward a brighter financial future.
Overspending Can Lead to a High Balance or Not Enough Available Credit
Your utilization rate or the amount of available credit you have will also negatively affect your score. In addition to your overall balance, pay attention to the amount you have. Make it a rule to keep your utilization rate below 30 percent on your credit card at all times. Maxing out your credit cards or leaving a part of your balance unpaid won’t work in your favor.
Credit cards provide another payment option, especially if you’re in an emergency situation. However, nothing beats having money saved for an emergency. The last thing you want after an emergency is to end up in crushing debt. It’s important to use them responsibly and to pay attention to your report. Check your credit reports for free from the three major credit bureaus at annualcreditreport.com.
Erin Ellis
Accredited Financial Counselor ®
Philadelphia Federal Credit Union
eellis@PFCU.COM