We all use credit cards to purchase goods or services when we don’t have cash on us, or if we just prefer more conveniently – let’s face it, it’s a lot easier to take out that rectangular piece of plastic from our wallets than it is to sift through dollars. Credit cards also afford us the opportunity to make an immediate payment whenever a financial emergency unexpectedly arises. The main downside to credit cards, as many people have found out the hard way, is that too many of us live for the moment and overcharge (or “max out”) their credit cards, getting themselves into financial trouble and racking up large amounts of debt.
In order to use credit cards effectively and stay out of debt, you need to understand the different aspects of acquiring credit so that you can manage your situation better and avoid problems down the road. One thing that needs to be kept in mind is that everybody has a credit history – if you have ever financed a car or mortgage or owned credit cards, you will have a credit history, and this is accessible by all financial institutions by request. Everything that you do financially gets recorded in your credit history file – your credit rating is EXTREMELY important, as it determines whether or not you will be approved for certain financial transactions in the future. Having a good credit score allows you to purchase the goods and services you need without hassle.
Keep the following in mind before reaching for that credit card:
Advantages of Using a Credit Card:
Credit cards can be used to purchase anything, as nearly all establishments accept them and they can be used in place of money you may not have. Companies allow staggered repayment, meaning that a customer can carry a balance and does not have to repay all of their credit card debt all at once. Lastly, credit cards afford people the opportunity to build their credit, and if a credit card is used responsibly and payments are made on time, it produces a high credit rating. High credit ratings are looked upon favorably by employers and financial institutions alike.
Disadvantages of Using a Credit Card:
If not used responsibly, a credit card can truly make your financial future extremely bleak. The staggered repayment system that credit card companies use certainly creates false security, and people spend a lot more money than they really should. Even if debt is paid little by little, credit card companies charge you interest on the unpaid portion (the balance), and in many cases, it is a pretty high interest rate, usually in the teens. This is how credit card companies make their money.
Remember to read over all terms and conditions before signing a credit card application. Companies love to play around with interest rates, and use all types of marketing schemes to lure in new customers, such as introductory rates and “variable” interest rates. Introductory rate-credit cards should be avoided, as they offer low interest rates at the beginning before eventually skyrocketing into the teens. Variable rate-credit cards are more acceptable, though interest could be as low as 5% one month and then keep fluctuating higher as time goes by. Fixed interest rate-credit cards are always preferable, since you always know where you stand. An interest rate between 5% and 10% is usually considered to be good.
To summarize:
- Only use your credit for vital purchases ONLY. Don’t overrely on a credit card, or you will get yourself into financial trouble.
- Keep track of all your transactions, and save receipts. This can help you be cognizant of how much you’re spending and if you need to start scaling back.
- Pay off your entire balance at the end of the month, if possible. Accruing interest helps the credit card companies, not you.
- Don’t risk a potential job or getting turned down for an important loan that is not a bad credit loan in order to purchase an item you don’t need and cannot afford. Use credit cards responsibly and choose one that offers tenable terms and conditions.
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