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Credit Card Pros and Cons

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Pitfalls of Credit Cards

In order to use credit cards wisely, it is important to understand their pitfalls.

1. Rising Credit Card Interest Rates- In many cases, credit card companies will change the annual interest rate without warning, thereby increasing the borrower's monthly minimum required payment amount. Some of the most common causes for interest rate raises are late payment, going over the credit limit for the card or simply economic changes in interest rates.
2. Introductory Offers- Many consumers fall for the attractive introductory offers commonly advertised by credit card companies. And while these low offers can benefit some individuals by allowing them to pay off their debts quickly, for consumers who continue to carry a balance or who make new charges, they can be surprised when the introductory offer rises. Before you take advantage of an introductory credit card offer, be sure to inquire as to what the offer applies to, how long the offer is available and what the rate will be when the offer expires.
3. Minimum Required Payment Amounts- In most cases, if the borrower were to only repay the minimum monthly payment amount, they would never be able to repay the debt in full. It is important that consumers are responsible when utilizing credit cards to avoid creating debts that cannot be repaid in a timely fashion.
4. Hard to Track Purchases- While you will typically receive a credit card statement showing your purchases for each month, during the month it can be challenging to know how much has been spent. For this reason, many consumers spend considerably more on a monthly basis than they would if they were paying in cash or with a debit card.
5. Late Fees- When a cardholder pays their payment even a day late, a fee is typically assessed to the credit card balance.

Valuable Features of Credit Cards

While there are pitfalls associated with credit cards, there are also a variety of advantages to consumers. Some of the most valuable features of credit cards are:

1. Itemized Expense Tracking- Many businesses and individuals enjoy the benefit of itemized expense tracking provided through a credit card statement. Using cash requires the organization and filing of receipts from purchases made which many find to be tedious. But, credit card statements can make this organization process easier. And, some credit cards even organize a year end summary by expense category that is helpful to those who need to itemize their expenses for their federal income taxes.
2. Rewards Features- Credit card companies often offer a variety of rewards features such as cash back, retail rewards points, travel rewards points and other rebates. For individuals who regularly use their credit cards, these features can provide tremendous financial value. For example, for someone who is an avid traveler, spending on a travel rewards credit card could mean free airline tickets or free hotel stays every year.
3. Extension of Credit- When a credit card offers a low interest rate, they can become a powerful leverage tool. For example, if your credit card only charges you 2% annual interest and you can earn 3% interest on your money in a cash investment, you benefit financially by 1% by utilizing a credit card instead of paying cash. While this may not make sense for every purchase, for larger purchases this leveraging power can be a tremendous financial asset.
4. Emergency Protection- In the event of an emergency, credit cards offer the cardholder purchasing power.
5. Ease of Purchase- Credit cards are simple to use, easy to carry and are widely accepted online and offline as a form of payment.
6. Credit Score- Wise credit card usage can work over time to improve an individual's credit score. The credit score that someone is associated with will often determine the rates offered by lenders for major purchases such as a home or an automobile. Higher interest rates mean higher monthly payments and a larger amount of money required to repay the loan. So, it is important for consumers to establish a positive credit score and credit cards can help.

Despite some potential pitfalls, credit cards offer consumers several advantages when they are used wisely.