It has been said that the biggest debt problem for Millennials isn’t student loans – it’s credit cards. This spending tool has become an essential part of our lives since their first introduction to consumers over 60 years ago. They can be used to make a purchase when you don’t have the cash available to complete the transaction.
You can also use a credit card to purchase something from an online or remote seller without waiting for the Postal Service to deliver a physical check in the mail.
If you are thinking about applying for a credit card or to get rid of all of the ones you have right now, then it is imperative to review all of the advantages and disadvantages of the spending tool. Some people find this resource to be a financial blessing, while it can also serve as the first step on the road toward bankruptcy for other consumers.
List of the Advantages of Credit Cards
1. Credit cards are very convenient to use.
If you have a Visa or a MasterCard, then you can use your credit card at almost any retail destination. Most service providers also accept credit cards as a form of payment. That means you can save time by going directly to the business instead of stopping at a bank, credit union, or ATM to take out some cash. Some places now even make it possible to leave a tip when completing the transaction, eliminating the need to bring money with you altogether.
2. You can complete transactions in a variety of ways.
When you have a credit card available, then you have more purchasing options that you can use when you want to complete a transaction. It is possible to pay someone over the Internet, in person, or over the phone when you have this lending resource. If you only have cash available when you need to make a purchase, then your only option is to complete the transaction in person.
You do have the option with cash to purchase a money order to gain some of the flexibility that credit cards offer, but that choice comes with a higher fee than what you would pay without the physical money.
3. Credit cards give you a way to pay for large transactions over time.
When you pay someone in cash, then you are finishing a lump sum transaction that usually requires you to pay everything at once. If you complete a purchase with a credit card, then the lender typically gives you the ability to pay your balance off over a period of time. Although it is considered a best practice to pay off your credit card balance in full each month, you can take more time on a large or emergency purchase to get ahead of the debt.
You will pay more over time because of interest charges with this advantage, but it also gives your finances more flexibility than it would have without them.
4. You can earn rewards for using credit cards.
Most credit card companies will provide you with specific rewards that you can earn with each transaction. This benefit can come in the form of points, miles, gift cards, or merchandise. Several lenders use a cashback option as a reward for spending, giving consumers between 1% to 2% back on each transaction. Then you have the ability to redeem the available rewards whenever you want, assuming that you meet the terms and conditions of the program.
If you can pay your credit card balance off each month to avoid interest charges, then the rewards programs can be a creative way to save money.
5. Most credit cards offer low introductory rates.
When you apply for a new credit card, then there is an excellent chance that you will receive a promotional offer. Most lenders will give you a 0% APR for at least six months when you are approved for a new account. Some people with excellent credit can receive a low introductory offer that lasts for 18 to 24 months, depending on the account type that they prefer. This benefit gives you the option to use your card for an initial purchase without needing to pay interest over time while you pay down the balance.
6. You have access to security features when using a credit card today.
Today’s credit cards are much more secure than the ones that were used in previous generations. Almost every account now comes with a chip that a merchant reads when you initiate a transaction. Then you can follow that feature up with a signature and a photo identification to verify who you are.
If someone were to gain access to your checking account, then they could drain it or write bad checks that others would potentially try to hold you responsible for issuing. Then you need to wait for the bank to process your fraud report before receiving replacement funds. When a credit card is reported as stolen, you won’t get cleaned out in the process as you would with your “regular” money.
7. Credit cards give you the right to dispute billing errors.
If you dispute a charge on your credit card in writing, then you have the right to withhold payment for a billing error. You must dispute any error on your statement with the issuer of the credit card immediately to use this advantage. Even if the issuer’s investigation finds evidence against you during this dispute, you still don’t have to pay for that purchase until their work is complete.
8. Credit cards are accepted almost everywhere in the world today.
If you do a lot of traveling, then a credit card is a tremendous advantage to have in your purse or wallet. You won’t need to exchange currencies as often with this resource because your lender will do that work for you. Although you might find yourself paying a 3% fee for each international transaction that you complete, there are accounts available that don’t charge anything for this benefit.
Then you can pay the final balance on your credit card with your home currency whenever you return from your travels – or at least when the minimum monthly payment becomes due.
9. A credit card can extend your purchasing power dramatically.
Credit cards give individuals the ability to extend their purchasing power by offering a specific credit limit. That means you can cover a specific emergency purchase up until the amount that is given to you by the lender. If your credit score is good enough (usually 750 or higher), then you can typically carry enough open credit to match what you would earn from your job in a single year.
Credit cards can also extend your purchasing power by proving to future lenders that you are responsible for your obligations. Having a strong credit score can help you to secure a lower interest rate for a loan because the application presents less risk to the lender.
10. Credit cards provide you with a grace period for your spending.
When you make a purchase with a credit card, then you have a minimum of 21 days from the time you receive your bill each month to pay the balance. This grace period means that if you pay your bill in full monthly, then you might have up to 51 days before you must pay your credit card issuer back for a purchase.
This advantage not only helps with your cash flow, but it can also be useful in the rare moments when you detect an unauthorized charge on your billing statement. You receive a buffer that can help you manage your finances better while giving you a buffer against potential problems.
11. You can make reservations with your credit card information.
Most hotels and rental car organizations require you to provide credit card information when making a reservation. Although a debit card can satisfy this obligation, you can use a credit card as a way to protect your bank account privacy. Most businesses in the hospitality industry will place a hold on your balance in case there are any incidental charges. If you use your primary checking account to pay for these items, then the restriction of the hold makes it so that you cannot access your entire balance.
When you book these items with a credit card, then you might have access to higher levels of travel insurance then what would be available if you only paid cash.
12. Credit cards give you the option to transfer balances.
If you receive a 0% APR introductory offer from a credit card lender, then you typically have the option to transfer a balance from a high-interest account to this new one. Even when you consider a 3% transfer fee, you can reduce the amount that you owe on a debt substantially with this benefit. It doesn’t need to be a credit card debt to qualify for this advantage either, as many issuers allow you to transfer balances from several different loan types.
13. You can receive expense tracking and other small-business perks.
Credit cards can be substantially beneficial for small businesses and their finances. Issuers offer expense tracking tools that can help everyone see where their spending habits are to get their money under better control. You can manage cash flows and budgeting more effectively because of this advantage. You can earn rewards on needed items, including services, and receive the option to give employees a card with a customizable limit.
14. Everyone in the family can access the same account.
Most credit card companies give successful applicants the option to request an additional card for other family members. Although this benefit gets marked as a way to earn rewards faster, it has a practical advantage to consider. If one spouse has an excellent credit score and the other does not, then a new account can give the couple’s overall combined rating a boost. Some accounts allow parents to extend a customizable credit limit to their children so that they can practice spending accountability before reaching the age of majority.
15. Some credit cards offer extended warranties on some products.
An extended warranty can seem like a good investment if you purchase an expensive item. If you purchase these big-ticket products with your credit card, then you can receive the added protection without an additional cost. You should seek out information from your account’s terms and conditions to see what items receive coverage and at what amount.
Many people find that the money they pay for an extended warranty is a very bad deal once they discover this unique benefit of carrying a credit card.
List of the Disadvantages of Credit Cards
1. Credit cards often lead to high levels of consumer debt.
The average American has four credit cards that they use regularly. According to information published by Experian, the median amount on each card is almost $6,200. That means each household in the United States is trying to manage over $25,000 in credit card debt right now. This information shows that many people use this lending tool as a way to finance the things that they want to have in their lives
2. It can give you the illusion that you have more money than you really do.
It can be a beneficial thing to have credit cards extending your purchasing power. The problem with the facet of modern spending is that it can give some people the illusion that they have more money than they really do. When you complete a transaction with plastic instead of cash, then you are spending money that you do not have and may not receive. That’s why so many people find themselves dealing with high levels of doubt in this area.
Let’s say that your monthly income is $5,000. After you take care of all of your expenses, you might have $1,500 left in discretionary spending. If you have a credit limit of $20,000, then you have the ability to immediately spend more in one month then it would take you an entire year of savings to achieve otherwise.
3. You will eventually pay interest on the balance.
Credit card issuers make money because of the interest payments that are on these debts. If you only make the minimum monthly payment, then most of those funds are going straight toward the interest obligation. That’s why it can take so long to pay off a credit card. If you averaged about $4,000 of debt on an account with a 17% APR, then you’d pay about $450 in interest over a year if you didn’t pay that balance down any.
Because the average household in the United States carries for credit cards, then you are paying about $1,800 in interest alone on the debt that gets carried. That’s why it is essential to pay off this debt as much as possible each month.
4. Credit cards reduce your future income potential.
Your income in the future gets reduced every time that you use a credit card. Although this disadvantage applies to any form of debt, it causes a portion of your wages to go toward repaying your obligations to the balance if you want to protect your credit score. If you have a higher level of debt, then it is more of a challenge to pay it off – or even pay it down. When you continuously use your credit card to make purchases while only making the minimum payment, then your debt levels are going to rise.
5. You might get charged late payments or other fees.
Although this disadvantage is not as influential as it was in the 1990s, it can still be problematic for some households. If you miss a payment on your credit card, then the issuer has the right to charge you a late fee. This amount is usually above $30, and it applies to any balance. Additional fees can apply for other outcomes, and these charges can add up quickly. When you have these fees apply to your balance, then interest charges apply to them as well.
6. It puts you at a higher risk of experiencing financial fraud.
If you have a credit card, then you are at a higher risk of experiencing financial fraud at some point in your life. Today’s thieves don’t need to steal your physical card to obtain your information. The bevy of data breaches that have happened over the past decade proves hackers can obtain this data by going into business information networks to steal customer credit info. Then they use your card number and personal details to make purchases or apply for new accounts.
You are not typically held liable for fraudulent purchases if you report the incident right away. It is also your right to close any account that you feel was opened fraudulently. Dealing with these issues can become a significant and costly headache if it happens repetitively, which is why some consumers are considering a move away from this lending product.
7. Your credit score is directly tied to the debts that you manage.
A low credit score impacts more than your ability to make a purchase. It can also impact your professional life. It reduces your option to use credit in circumstances when you need it the most. This issue also communicates a lack of responsibility to employers, making them think twice about putting you into a position where you would manage a significant budget. It can prevent you from buying a house or finding an apartment to rent.
Credit cards can even lead to bankruptcy in severe cases. This outcome will stay on your credit report for up to 10 years, impacting the way that you can finance purchases during that entire decade. That’s why this financial tool should only be used in emergencies or with great responsibility.
8. You have no guarantee of approval or ongoing access.
Credit card companies are under no obligation to grant an account to an applicant. Although lenders must tell you why they decide not to issue a card, the failed application can result in a lower credit score for some people. Even if you do receive approval, the issuer typically has the right to close the line of credit at any time. If there is a balance on that card, then you would need to pay it off even though you don’t have access to the account anymore for future spending.
9. Different interest financing can hit you with a massive expense.
A common practice for credit cards is to offer a 0% introductory APR for specific purchases. If you don’t pay off the balance before the end of that time, then interest applies retroactively to the entire amount at a high rate. It would be like you never had that benefit. You must pay close attention to retailer financing offers to avoid the problem or use a Visa, MasterCard, Discover, or American Express product to complete the transaction.
Credit card debt creates a vicious cycle that is easy to get yourself into and difficult to remove yourself from quickly. The only way to avoid this scenario is to not charge transactions that you can’t afford to pay right now. Then make sure that every payment gets made on time so that you don’t reduce your long-term credit score.
When you can use credit cards correctly, then this financial tool can help you to build an excellent credit score. You can use that information to qualify for a mortgage or other loans you might need without paying a needlessly high-interest rate. They are also useful in emergencies.
When reviewing the advantages and disadvantages of credit cards, it is essential to review your spending habits in an honest light. If you struggle with impulsive purchasing, then this tool is not something you want to have around. When you can pay the balance off each month and earn consistent rewards, then it is an account that can make your money stretch further than it does as plain currency.
Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.