Credit Card Advantages and Disadvantages

Credit Card Pros and Cons

Let’s talk about credit card advantages and disadvantages.

Do you want the good news or the bad news? I like to end things on a good note, so let’s start with the bad news first.

The bad news is credit cards can be a trap and an easy way to get into debt quickly. However, the good news is credit cards can actually help you build credit, pay off debt, and earn extra income.

You’re probably wondering how I could possibly justify both sides of this coin. Well, let me explain. 

The Dangers of Credit Cards

Credit cards are dangerous, no seriously, some people would be safer crossing the freeway at night in dark clothes than owning a credit card. Credit cards can be a jump start into creating a huge debt burden. 

Many Americans operate with an, “I need to have this now,” attitude that can be severely detrimental to their overall financial health. Managing credit cards takes a ton of discipline and focus, and it is truly not for the faint of heart.

Let’s get into some of the cons of credit cards.

The Minimum Payment Trap

Another downside to credit card usage is the minimum payment trap. Many people get trapped in the idea that as long as they can make the minimum payments, everything should be fine.

This is the worst possible assumption when it comes to credit cards. Almost always, only paying the minimum payment causes you to pay significantly more money over time. This is an easy way to accumulate debt and not even realize the true impact.

High-Interest Rates On Debt

Credit cards tend to have some of the highest interest rates in all of consumer debt. These rates can get up to 20% or more, which is significantly higher than many other common sources of debt such as mortgage or auto loans.

Credit cards are truly an expensive form of debt, but there’s a reason for that. Credit cards are considered a form of unsecured debt. Basically, that means the balance on a credit card is not secured by a physical asset.

If you were to default on your mortgage or auto loan the lender could “collect” the asset associated with those loans. In this example, that would be the house or the car you purchased with that money.

Unsecured credit is always, always, always considered riskier for this reason, and as a result, will tend to have higher interest rates.  

Potentially Negative Impact On Credit Score

So here’s the thing about credit cards and credit scores, if you don’t management them right you could very quickly damage your credit. The key is to understand how certain actions impact your credit and ultimately your credit score.

There are multiple ways credit cards could negatively impact your credit score, some of which included: Missed or late payments, high balances, and/or too many credit cards.

1. Missing or late payments on credit cards

This first one is pretty obvious. Missing payments or sending payments late can have a significant negative impact on your credit report and score. The missed payments will be reflected in your credit history for years to come. Late or missing payments, especially if they happen frequently, signals to future creditors that you are potentially a risky borrower. 

2. High balances on credit cards

Having high balances is another way your credit report could be impacted. Higher balances impact your credit utilization – driving it higher. High credit utilization tells the lender that you don’t have a lot of available credit to cover new expenses – for example, emergencies.

3. Too many credit cards

Similarly, having too many credit cards can impact your credit negatively. Once again, if you carry high balances on those cards, you’re driving your credit utilization up. Also, too many credit cards with balances can add up to a lot of debt. If you don’t have an income level that could seemingly support that amount of debt, you could be driving your debt-to-income ratio up – which is bad.

Fees Can Increase Debt

Credit card fees can make holding debt on credit cards expensive. The fees can be annual or they can be applied to a single transaction. For example, if you were to transfer a balance to pay off on a credit card, there may be fees associated. 

Also, cash withdrawals on credit cards tend to have fees associated with them as well. This is why understanding credit card terms and conditions are extremely important. 

Tempting and Confusing Promotional Offers

Credit Card Disadvantages

Picture it, you get a notice in the mail for a shiny new credit card. They’re offering 0% APR on balance transfers and a super low introductory rate on purchases. Also, in that same stack of mail, you have an advertisement for a close-out sale at your favorite store! The choice seems simple right? Wrong! 

What that shiny new credit card offer doesn’t tell you is the super low APR on new purchases, is only for the first 60 days…and oh yeah, that balance transfer rate is only good for 6 months, then it skyrockets. This how understanding deferred interest vs. zero interest promotions really comes in handy.

Unfortunately, those tempting offers can give you a false sense of security when considering just how expensive that promotional offer can be down the road.

Credit Card Advantages

Now that I’ve scared the crap out of you, here’s some good news about credit cards. While credit cards do have their drawbacks, for those who do have the discipline to maintain a healthy relationship with credit cards they can be very helpful tools to meet your financial goals.

Convenience

Credit cards are easy to use. The digital aspect of credit cards makes it easier to use them both in-person and online. Also, transactions can be tracked digitally, making it easier to track expenses. If you are someone who prefers to track your expenses electronically, using a credit card certainly makes that process much easier than using cash.

Increased buying power

When you’re able to use your credit cards responsibly you can have significantly increased buying power. They can provide an instant loan when needed without the hassle, or time constraints, of applying for a loan.

Can help build credit

So, I mentioned above how credit cards can negatively impact your credit report and score. Now let me tell you how proper management of credit cards can actually help you improve your credit score.

Proper management of your credit cards means keeping balances low. Doing so actually improves your credit utilization, essentially lowering it. 

When creditors see that you can pay off credit card balances regularly enough, it’s a signal that you are a less risky borrower and are more likely to meet your payments in full and on time. This can also mean an easier process when making large purchases in the future, such as buying a home.

Rewards programs

Credit Card Advantages

Until this point, we’ve talked about some advantages of credit cards – what I would consider the “good” stuff. Now let’s talk about the “really good” stuff.

If you’re fortunate enough to grab a card that has a rewards program, you can really benefit from what those programs offer. Some cards offer cash back on purchases, travel and mileage rewards, gift cards, and merchandise, to name a few. 

These rewards programs can be very helpful in stretching your money. For anyone who has ever had to stretch their resources beyond what could be seen as rationally possible, this is truly how to make a dollar out of 15 cents.

One way to really make credit card rewards work for you is to use your credit cards throughout the year, paying the balances off each month, then using all of your rewards points at the end of that year to pay for a vacation. Let me tell you, this is a tried and true method I’ve used many times for discounted or completely paid vacations!

Using promotions can help pay off debt

So, I mentioned promotional offers above as a disadvantage of credit cards. However, this is only a disadvantage if you aren’t….wait for it….managing your credit cards properly! 

Introductory APR

Using an introductory APR offer to pay for a major expense can help to significantly reduce the total amount of debt you may have to pay long term. I would suggest using these promotional offers in times of emergency situations, however. Just because you have the offer, doesn’t mean you need to find ways to use it. 

If your refrigerator goes out, and you’re still in the process of building your emergency fund, you really can’t wait to collect enough cash to go out and buy a new refrigerator. So, if you have an introductory offer of 0% APR on your credit card, by all means, use it! Just be sure you understand the terms and conditions AND you know exactly when that introductory period ends.

Balance Transfers

Another way credit card promotional offers can work in your favor is with balance transfers. If you’re in the debt repayment phase of your financial journey you can use credit cards with a 0% balance transfer rate to pay off credit cards with higher interest rates. 

You may be wondering why I would suggest using more debt to get out of debt. Don’t worry I’ll explain. 

Balance Transfer Example:

In this example assume you have two different credit cards. One has a 15% APR and the other has a current offer for 0% APR on balance transfers for 12 months with a 4% fee. 

If you have a $1,000 balance on a credit card with a 15% interest rate, after 12 months you will have paid $1,083 to pay off that balance. 

However, if you transfer the balance to the other card that has the offer for a 0% APR on balance transfers, you will only pay $1,040 after that 12 months – even if the card has a 4% balance transfer fee. You will have saved $43 by simply transferring your balance. 

Check out the illustration below for more clarification:

Balance Transfer Savings

I’ve actually used this strategy a few times and have gotten to the point where I hardly ever, if ever, pay interest on credit card balances. So it works, I’m living proof. 

But, as I mentioned before it does take discipline, discipline, discipline! I know you’re sick of me saying that…but one more time for the slackers in the back…DISCIPLINE! Ok, I’m done.

Concluding Credit Card Advantages and Disadvantages

Like many other financial decisions, you’ll have to make, choosing whether or not, and how, to use credit cards can be a critical task on your journey to financial freedom. Successful management of credit cards all depends on your mindset and willpower, but will also depend on your understanding of credit card advantages and disadvantages. 

When it comes to credit card usage, just be smart about it, weigh your options, and evaluate your personal finance goals before you dive into the credit card pool. 

You’re either going to sink or swim, but please swim…that’s way better. Good Luck!

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Krystal Norwood-Morales, MBA, CFEI

Krystal is a Certified Financial Education Instructor and founder of Wild About Wealth, LLC. As a financial literacy advocate, she writes posts geared toward helping others improve their financial education and build generational wealth.

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Krystal Norwood-Morales, MBA, CFEI

Personal finance blogger

As a certified financial education instructor and financial literacy advocate, my mission is to teach young adults how to build generational through financial education. So let’s get WILD about WEALTH!

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