Financial Know-How
Plus / Minus of Credit
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Positives of Credit
Establishes credit history, important when buying a car or home
More likely to be accepted when traveling, as opposed to checks
Security if card is lost
May be easier to keep track of your purchases and spending habits, thanks to monthly statement
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Negatives of Credit
Higher interest rates than other options
Fees and Finance Charges
Danger of building debt
May lead to purchases larger than what can be reasonably afforded
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Positives:
Credit History
As stated on the Credit Report section of this site, building a credit history is vital to your personal financial success. Credit cards can be an integral part of this building process, your payments demonstrating your financial security to possible lenders. Unfortunately though, it can also be an integral part in abusing your credit history, with any missed payments or maxed out cards showing you may be a financial risk.
Travel
If you’re traveling, for vacation, class, or with family, you will probably not want to have all of your money available as cash, and some establishments may not take a check from a non-local address, It may be important to have another option, such as a credit card, to make your travel move along smoothly. Be prepared though to pay the bill when it is due, and not let the memories of a great trip be smashed by extended credit card payments.
Security
If you happen to lose your card or have it stolen, you can call the company and have the card shut off; prohibiting anyone from using the card. You may also have some protection from any charges made before you reported the card as lost or stolen, which is certainly not an option if you’ve lost cash.
Tracking your purchases
Each month you’ll receive a statement from the credit card issuer, and you can examine just how much you’ve spent and where the money went. This may help you as you plan your budget or make other financial decisions.
Negatives:
Higher Interest Rates
In order to make a profit, the companies offering you a credit card will charge you interest on the products and services you buy. This interest rate will likely be much higher than the rates charged for other types of loans, including student loans, car loans, and mortgages. Sometimes these credit card rates may be 2 or 3 times as high as the interest rates charged on other loans. You may be able to find more competitive rates once you’ve established a strong credit report (link to credit report page)
Fees and Finance Charges
In addition to your interest rate, your credit card company may require additional fees or finance charges, as well as penalties for going over the card’s limit or making a payment late. These charges can in some cases be added to your card balance and can be charged the same rate of interest as your purchases.
Debt
If you are unable to pay your balance each month, you will begin to accumulate debt. As your debt increases, your ability to pay off your balance will become more limited. If you continue to make charges with your credit card, adding to this debt, it will steadily increase the amount that is calculated for your interest, adding an invisible cost to the products and services you’ve already bought and used. In some cases you may still be paying months later for an item or service that you no longer use.
Large Purchases
You may fall in to the “pay for it over time” trap of the credit card, and begin to purchase more-expensive items that are outside of your budget. A $1000 big screen TV can quickly become a $1500 boon to your credit card debt.
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