Using Credit Cards — Advantages and Disadvantages

Credit cards are a great concept but they end up bringing financial ruin to many people because they do not use them properly. Too many people get a credit card and then find that it is maxed out within twelve months. Then for the rest of its existence they end up paying off interest and barely making a dent in the principal. This is not a good way to manage your money.

Let’s go over some of the benefits credit cards offer before we get into their detriments. A credit card can be a great convenience and provides the safety of not dealing with cash, which is more easily lost. Credit cards are also very useful in the sense that they offer protection under the Consumer Credit Act and you can often get your money back in a fraudulent purchase that you would be unable to do with any other payment method. Credit cards also offer “incentive” benefits such as air miles or credit toward future purchases. Credit cards also give back a percentage of your purchases to approved charities in some cases which is a really nice way to give back at the same time you are spending the money you normally would spend. Therefore there are most certainly benefits for using a credit card.

Given all of the above, credit cards still cause problems for most people more often than they provide benefits. Most of these problems come in the form of excess consumer debt, which arises when one carries a balance on the credit card while paying the absolute minimum each month. These problems occur when one begins looking at the credit line of your credit card as simply bonus money that you now have to spend. Instead you need to allocate existing funds for every purchase you make on a credit card. This way you know that you will be paying off that principal balance at the first of next month rather than carrying for your foreseeable future.

Another problem that happens with credit cards is that people simply get too many of them. With the credit environment as it is today most people are barraged with new credit card offers practically every day of the week.  Unfortunately some people accept each one of those offers and end up with more credit cards than they know what to do with. With increased numbers comes increased temptation. When you have a multitude of credit cards it becomes much easier to talk yourself into carrying a balance on each one of them. This is not a good idea, as discussed earlier.

You also need to be wary of signing up for credit cards. While, most are legal, some companies are really towing the line between ‘legal’ and ‘not legal’. Watch out for companies who charge a “membership fee” or have a substantial charge for late fees.

So what is the correct way of approaching and dealing with credit cards?

Rule #1 – Never use credit cards as extra money.
Always allocate money from your current funds or monthly income in order to pay whatever you finance off immediately.

Rule #2 – Read the fine print.
Too many people simply accept the offers sent to them in the mail without reading the details of the interest rate and credit terms. While it may seem insignificant on first look, over time it can create a negative financial situation for you very easily. Read the print and make sure you get the best terms available.

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