Credit Cards: The Good, The Bad, The Ugly
Credit cards. A number of different images may flash through your head when you hear those two little words. Do you picture yourself freezing your card in a block of ice? Putting it through a shredder? Lighting it on fire?
Or do you see yourself casually strolling out of a store, shopping bags in hand, feeling elated about all the fabulous things you just bought and didn’t have to pay for…(yet)?
Either way, credit cards are a polarizing topic that seems to divide people faster than Donald Trump’s tweets. Some people equate credit cards with financial disaster and endless debt. Others view them as a way to build credit and save money through cash back and perks. Personally, I fall somewhere in the middle of the spectrum. Here’s a few of my own pros and cons of credit cards that will (hopefully) help you decide if owning a credit card is a good financial decision for you.
Let’s start with the bad news first.
Con #1: CREDIT CARDS CHARGE INTEREST – LOTS OF IT!
You’re probably thinking, “DUH.” But, let’s just say it like it is. The #1 reason why credit cards have a bad reputation is the high interest charged on unpaid balances. Even though most people know credit cards can charge high interest, many overlook the details. For example, exactly how much interest is your credit card charging? When does interest begin to accrue? On what amount does the interest apply? Does your credit card offer a grace period? All of these details can be found in the fine print, usually in confusing legalese than can make you feel like a chimpanzee trying to do calculus. In summary, the best way to avoid interest altogether is pay your full credit card balance on time every month. If you don’t, you’ll be that chimpanzee trying to do calculus to figure out how in the world your $200 new TV (it was such a great deal!) ended up costing you $500 (OUCH).
(Also, side note, there is a myth floating around out there that you need to carry a balance on your credit card and pay interest in order to earn good credit. This is absolutely false. Carrying a balance may hurt you, not help you. That’s all. Carry on).
Con #2: Credit Cards Can Be The Gateway Into A Deep Dark Debt Hole
Credit cards can be the gateway drug into a seriously dangerous debt problem. Why? Because they are so easy to obtain and so easy to use. Here’s a personal example for you. When I started my first job out of college as a social worker, I was making about $32,000 per year. I signed up for my first credit card and was given a credit limit of $4,000. Wow – $4,000! That’s a lot of cash! My credit card company must think I’m really responsible…
HOLD UP. Let’s do some math: Say my hypothetical take-home pay (after tax) was $28,000 annually. $28,000 / 12 months = $2,333 net monthly income. With a credit card limit of $4,000, I could choose to max out the credit card in the first month, buying a $4,000 all-inclusive vacation to Hawaii. Aloha to me!
The problem is, in order to pay the balance off, I would have to use my entire $2,333 paycheck over the next few months to pay off the full credit card balance. This is nearly impossible, because I would have no extra cash left over to pay for rent, food, transportation, clothes, or anything else for that matter. As a result, that remaining unpaid balance gets carried over from month to month – and is charged interest in the meantime. And that, ladies and gentlemen, is why credit cards can be a gateway drug. Easy to obtain. Easy to use. Easy to spiral out of control.
Thankfully, I didn’t fall into this debt trap. I never used more than 25% of my credit limit and made sure I could pay the balance in full at the end of every month. Ironically, because I was using my credit responsibly, I received about five credit card offers in the mail every week and was offered a credit limit increase. All of this is great until too much of a good thing becomes a bad thing. It can be easy to become addicted to borrowing money – even if you are responsible with paying it back. Having $10,000 in debt and a great credit score is still not as good as having no debt at all.
Con #3: Credit Cards Aren’t Necessary
That’s right. You don’t need ‘em. In today’s culture, having a credit card is equivalent to having a cell phone. If you don’t have one, you’re living in the dark ages. But in reality, you really don’t need a credit card – especially if you’re able to build up credit through other sources, like student loan payments. Side note: credit cards + social media = disaster waiting to happen. Why? When we constantly see posts of people taking luxurious vacations, buying a new home, getting their dream car, or wearing designer clothes, we often (even subconsciously) feel like we’re missing out. In order to “keep up with the Jones’,” we swipe our credit cards to pay for a lifestyle we can’t afford. Guess what. A lot of people who appear to have it all on social media may actually be drowning in debt to keep up with the image they want to portray. Don’t fall into that trap. (Okay, I’ll get off my soapbox now. Thank you for coming to my TedTalk).
And now for the good news:
Pro #1: Credit Cards Help Build a Good Credit Score
This is true – IF (and that’s a big IF) you diligently pay your full balance each pay period. And, as stated in Con #3, you really don’t need a credit card to build up your credit score. Other methods of building credit include paying off student loans, getting a secured loan or secured credit card (backed by your own pre-deposited money), or becoming an authorized user on someone else’s credit card (ideally someone with good credit history). In fact, I would argue that building credit through one of these methods is a much safer option than diving head first into an unsecured credit card.
As a disclaimer, here is my personal story. I graduated college without any student loans, and I will remain eternally grateful to my parents for their sacrifice to make that happen. As a result, I vowed to never put myself into unnecessary debt, since my family worked so hard to keep me out of it. But, this also meant I had no credit to my name. I started with one universal credit card with no annual fee and some small perks. I only used this card for a few designated expenses, like rent and gas, so my spending wouldn’t get out of hand. Over the next couple years, I paid this card on time each month and also added a couple store cards as well. I was able to build a solid credit score in a relatively short period by consistently paying the full balance, using different lines of credit, and keeping my credit limit usage under 25% at all times. BUT, this is my personal story. It is not the universal solution to building credit. Find a method that works best for your personal financial situation.
Pro #2: Credit Cards Provide Points and Perks
If I’m being honest, this Pro could also be a Con. Here’s why: while most credit cards offer some incentive for use (like cash back or airline miles), the benefits may not outweigh the expenses. For example, if you have an airline credit card with a $100 annual fee, but you only take 2 flights per year to earn $50 in airline miles, then you really lost money by using the card (especially if you were charged interest on unpaid balances from month to month). Make sure if you’re purchasing a card with an annual fee, you calculate whether or not the annual fee will produce enough benefits to justify the cost.
NerdWallet has an excellent credit card comparison tool to help narrow down which credit card will be the best fit for your lifestyle. (#NotSponsored). In fact, I used this tool to find my first two credit cards, based on my spending habits, credit score, and desired benefits. One of the cards I decided upon is the Amazon Prime Visa card (Again, #NotSponsored. But, Amazon, if you wanna slide in my DMs…)
I already buy the majority of my essentials on Amazon, everything from dish soap, to cat food, to breakfast bars. By using the Amazon Prime credit card to make these purchases, I also earn 5% cash back on these transactions and 1% back on everything else. What makes this really valuable is, nearly every time I go to order some of these essentials Amazon, I have anywhere from $5-$25 cash back to use toward my purchase. Again, this is what works best for me, but it may not be the best fit for you. Try out the NerdWallet calculator to find your best credit card fit.
Pro #3: Credit Cards Teach Financial Discipline
Just because you could eat a whole box of donuts in one sitting doesn’t necessarily mean you should.
Similarly, just because you could spend your full credit limit in one month doesn’t mean you should. Using credit cards effectively requires discipline and discernment. Many people get themselves in deep debt trouble when they begin to disassociate their actual cash money from the motion of swiping their credit card. In other words, it’s easy to forget about the pain of paying for purchases when you have the ability to enjoy something instantly without paying a single penny upfront. Credit cards themselves are not the enemy. It’s the emotional and psychological response of purchase without pain that gets us in trouble. The good news is, we have the ability to acknowledge the mental pitfalls of credit card usage and shift our mindset to avoid them. Here’s a rule I personally follow to keep my finances in perspective: I never make a credit card purchase if I don’t have enough money in my checking account to cover it immediately. Credit cards make it easy to spend money we don’t have, but they don’t need to lead to financial ruin. A shift in mindset and a healthy dose of discipline is all you need to make sure your credit cards are working for you, not against you.
**P.S. If you read this and thought, “Well, shitake mushrooms. I’m already up to my eyeballs in credit card debt. Now what?” No fear! We will be tackling debt reduction planning in our future content very soon!
Written By: Kaitlyn Duchien
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