Have you ever found yourself, in the midst of making a purchasing decision, listening to the opposing arguments of the “good guy” on one shoulder and the “bad guy” on the other? If so, having a credit card readily accessible can only make this dilemma more difficult. This is why it’s important to have a plan for how you intend to use your credit card before you head to the store (or in the case of many tech savvy consumers, before you open up your notebook computer).
Credit cards can be a great financial tool that you can use to build your credit, or they can be a detriment that can wreck your fiscal discipline. The difference is in the details.
Credit card pros
1. A safer way to buy. Unlike cash, a credit card can be easily replaced if you lose it or if it is stolen from you. And unlike debit cards, credit cards offer maximum protection when you’re buying online. These safeguards can give you extra confidence as a consumer; it also keeps you from spending cash that you may need for more pressing matters.
2. Help building your credit score. One of the biggest advantages of having a credit card is that it can help you boost your credit history if you use it responsibly. Paying your bills in full and on time each month sends a message to creditors that you are a thoughtful consumer, which can make you more eligible for larger purchases when the need arises, such as a car or a house. In these situations, having a high credit score can win you lower interest rates.
3. Your financial ‘plan B’. Credit cards are also helpful when you are facing unforeseen costs that might tip the scales against your financial favor otherwise. If you find yourself needing new tires for your car, a way to pay for emergency medical costs, or an immediate repair to your house, having a credit card can prevent you from having to scramble for the cash. But in order to use your card in emergencies, you’ll have to make sure you keep your line of credit relatively open.
Credit card cons
1. Interest rate woes. The biggest disadvantage of using a credit card is the fact that you will pay interest on anything you charge. The problem is compounded for many consumers who choose to make just the minimum payments on their balances, which is a good way to snowball your debt quickly. In order to beat the interest on your credit card, make sure that you pay as much as you can toward your balance each month, and always pay on time–penalty interest rates can be double what you’re paying now.
2. Temptation to spend more. Credit cards can also make your purchase decisions more difficult, especially if you are living within a limited budget. It’s important not to give into the temptation to buy items that you don’t need just because you have the credit to do so. If you struggle with this, a good tactic to employ would be to make all of your day-to-day purchases in cash so that you can keep a realistic idea of how much money you’re spending.
3. The risk of destroying your credit score. There are a number of credit card habits–such as missing payments, coming dangerously close to your credit limit, or, even worse, exceeding your credit limit–that can send your credit score plummeting. Just as easily as your credit card can help you during a rainy day, it can be the storm clouds hovering over your financial outlook.
Of course, whether you find yourself in financial heaven or fiscal hell all depends on how you employ your credit line. As long as you count every swipe and keep checking your card balance, however, you’re in the clear.
Photo by 401K 2012