It is often said that there is nothing that has an advantage that will not have a disadvantage. This statement holds true when it comes to credit cards. For those people who has one already, one may not need to tell much story before they understand some of the advantages of having a credit card. But if they are to be sincere with you, they will also let you know that there are also some disadvantages that come along with having a credit card. If you are yet to have your own credit card or you are contemplating of getting one, it is important that you understand some of the benefits and the pains that may come with having a credit card. Without any reference to any particular type of credit card, below are some of the advantages and disadvantages of credit cards
Benefits of Having a Credit Card
- Convenience: Credit card is just a small plastic. It is light and very easy to carry. It doesn’t matter the amount of credit limit on your card, the weight still remains the same. Carrying cash can be very bulky, especially when the amount is much. I can’t just imagine someone carrying cash to go and buy a car. Also, when you make purchase with credit card, you will be able to take advantage of different discounts being offered by stores and supermarkets. For instance, if an item is sold for $9.99, you may not be able to pay this amount by cash. You may realise that you end up paying $10.00. But if you pay with credit card, you will be able to pay exact price of the item.
- Credit History: You must have heard that you need credit to build credit history. This is true. If you have never had credit which you maintain and pay promptly, you can’t claim to be credit worthy. Some think that if they never owed anybody and they pay their bills in cash as at when due, their credit rating will be high. It doesn’t work that way. You need to have a credit card and ensure you use it responsibly. Through this, you will be able to build your credit overtime. Credit history is one of the criteria that the credit bureaus use to calculate credit score.
- Cheap loan: Any time you use your credit card to make a purchase, you are actually borrowing money as the money is not coming from your bank account. That is, credit card affords you the opportunity to buy things now and pay in a later day. If you are to apply for a loan, it may take some time before the approval is granted. Also, you will need to pay interest on the loan. But if you use credit card, you may even avoid paying interest on the amount of credit you use. This is possible if you pay off the card balance before the due date. You don’t need to be scared of the high apr of some credit cards. You will only need to pay interest on the card if you carry balance on the card or you use it to withdraw cash from ATM.
- Fraud Protection: The law provides protection for credit card holders. If you notice any unauthorised use on your card and you report promptly to your card provider, the maximum liability you can suffer is $50. But you have the responsibility to report the fraud on time.
- Easy to get approval for another card: For an existing credit card user, you can easily get approved for another card or for a new credit line. Having a credit card can qualify you for good loan interest or insurance rates especially if you use the existing card responsibly. A good use of credit card can improve your credit score. The higher your credit score, the more favourable rates you will enjoy on loans or insurance policies.
- Rewards and other perks: Another advantage of using credit card is different benefits, perks and rewards you can be offered. If you use credit card to buy groceries in supermarkets, you can earn some points which can be converted to gift cards. You can use the gift cards to make purchase. Also, there are bash back credit cards that give you certain per cent of the amount you spend with the card as cash reward to you. This can be in the range of 1%. That means, if you use the card to buy items worth of $100, you will be refunded $1. So, the card is actually putting money back into your pocket. The amount can add up to become significant. Besides, some credit card companies give their customers sign up bonuses. When you get new card, you will be given a certain amount as a bonus. They may not give the cash to you but the amount will be available in your card for use. Some cards also provide coverage for travel insurance, purchase protection and extended warranty insurance. So, before you buy travel insurance, you can find out if your credit card has already provided you with some level of coverage so that you don’t need to duplicate your them in your policies.
- Hotel bookings and car rentals: It is true that you can use debit card to make payment the same way you will use your credit cards. But there are certain transactions such as hotel bookings and car rentals that may require that you use your credit card.
- Multicurrency: One of the outstanding benefits of using credit card is the ability to shop in any part of the world without the need to convert your money into the currency of that country. You can also use your credit card to make purchase online. This makes credit cards to be more flexible than cash. When you use your card to pay for items in different currency, the card converts currency automatically into the other currency. Credit cards are universally accepted.
- Safety: Credit cards are more secured than cash. If you lost your card, you can be issued another one. Also, the fact that somebody stole your credit card does not mean that the person will be able to use the card. Credit cards can be secured with password. If the person does not have access to your password, he may not be able to gain access to your fund. In the contrary, if you lose your cash, you may not be able to recover it. If you lost your credit card, you just need to report to your card provider and a new one can be re-issued to you.
- Record keeping: For people that are poor at record keeping, the use of credit card can help them overcome this. Everything you use your card to buy will be well recorded. This will help you to know how you spend your money instead of asking yourself, where did your money go? Knowing how you spend your money can help you in budgeting. By extension, you will be able to control your spending too.
Disadvantages of credit cards
- Debt: Credit card can be a quick route to going into debt. If you are not disciplined in the way you spend, you may not know the time you spend beyond what you can afford to pay. Because you are not paying cash from your pocket, you don’t actually feel that money is leaving you. Just with a swipe of your card, you can pay for anything. This could serve as an advantage but it can also turn out to be a disadvantage. The problem with credit card is that, if you don’t pay the card balance at the end of the month or on the due date, interest will start to accrue on the balance.
- Damaged credit: Failing to pay your credit balance can lead to default. When you default in your monthly payment, you can be reported to the consumer credit bureaus. This will appear in your credit report. You may want to know how long does default stay on your credit report. The information about your default will stay on your credit report for six years. The effect is that, this will ding your credit.
- High interest rate: The interest rate on credit card is high. That does not mean that you can’t be offered low interest rate. Those people that enjoy low interest rates are people with good or excellent credit score. If your credit score is average or bad, it will be difficult for you to get a credit card. If at all you manage to get one, the interest rate is going to be high. The high interest rate will compensate the card issuer for the risk of default which they are exposed to.
- Fees: In addition to the high interest rate that you will need to pay on your card balance, several fees may still apply. Such fees include annual fee, cash advance fee, foreign transaction fee, balance transfer fee etc. However, it is not compulsory that you pay all these fees. If you know how to use your card responsibly, you may be able to avoid some of these fees. Also, if you shop around, you might get some credit cards that will not require that you pay annual fee.
- Fraud: The use of credit card to make payment on websites can expose you to identity theft. There are many scammers online presenting themselves as legitimate entity. If you use your credit card on such websites, your personal information may be stolen.