The Advantages and Disadvantages of Credit Cards: A Breakdown

There comes a time when most of us start wondering whether we should register for a credit card. On the surface, acquiring one seems like a rite of passage as we move up in the world and have greater earnings and outgoings, but do you actually need one? Although it's often assumed that everyone, once they hit a certain age, will get one, a credit card isn't a necessity for everyone. They definitely have their perks, but you might want to weigh up the advantages and disadvantages before venturing into the often-confusing world of credit cards! Figure out whether a credit card is a must or a miss for you with our practical list of pros and cons. 

How Do Credit Cards Work?

We've all heard all about them, but just how do credit cards work? Think of each purchase made on a credit card as a short-term loan. By repaying this amount within a given time, you'll prove you can pay back the money you owe and, therefore, deserve a good credit score that can help you with future loans. Your credit card limit is the maximum amount you're permitted to spend at any particular time, and how big or small this number is will depend on your income and current credit score. Essentially, the more money you earn and the better your repayment track record, the higher your limit. While making large purchases can seem like the primary way in which people use credit cards, they can also be used to pay bills and withdraw cash. 

Advantages 

Easy Access to Credit

As the name suggests, the purpose of credit cards is to give you access to a set amount of credit easily. Whether you're looking to buy something with a substantial price tag or need to secure emergency cash, a credit card will allow you to use this money right away before paying it back in due course. 

Boosting Your Credit Score

Many people spend money on their credit cards simply to elevate their credit score. As you establish a reputation for consistently paying off your credit card bill on time, you increase your chances of becoming eligible for bigger loans in the future, such as for a car or a mortgage. It might sound counterproductive at first, as it's basically putting yourself into a small amount of 'debt' to showcase your ability to get yourself out of it!

Added Security and Protection for Purchases

Another huge advantage of using a credit card is that it tends to be a more secure way to make payments. This doesn't mean paying with a credit card will make you immune to fraud, but it's believed to be lower risk than using a debit card. Also, if you feel that your card has been used without your authorization, your credit card company is much more likely to reimburse you.

Reward Systems

These days, some people utilize credit cards for their tempting reward systems just as much as they do to enhance their credit scores! Air miles, welcome bonuses, cashback offers, and discounts are some of the ways credit card companies provide benefits to their customers. Different cards come with specific perks, so it's worth doing some research to find what cards suit your lifestyle and spending habits.

Repaying Large Purchases With Equated Monthly Installments

Credit cards allow you to buy something outright that you ordinarily couldn't or wouldn't, thanks to manageable payment plans like equated monthly installments. Not every company has the same repayment policies, but in general, credit cards give you more time to get the money together for a sizable transaction.

Disadvantages 

Risk of Overspending

If you're not careful, you can easily make uninformed decisions about how you spend your money by relying too heavily on your credit card. Though these cards give you the chance to delay taking a hit for your spending, anything you buy will still need to be paid for in time. Much like you do with most purchases, it's crucial to consider the cost and necessity of whatever you buy with a credit card.

Accumulating Debt

Frequently overspending can lead to you facing a hefty debt further down the line. You might assume that, so long as you stay within your card limits, you won't accumulate much debt, but you'll never know when you'll fall on hard times. To avoid this, account for your credit card spending as you would with any other outgoings. 

Costly Annual Fees and Interest Rates

Unfortunately, the benefits of credit cards necessarily don't come for free, and you'll be required to pay interest on any repayments that aren't made on time. Interest fees aren't the only added cost associated with credit cards; you may also have to deal with fees for annual usage, foreign transactions, and late payments.

Understanding Both the Minimum and Total Amount Due

Whenever you receive your bill, there's a chance you'll see a figure pertaining to the minimum amount due and another for the total. If you're new to using credit cards, you wouldn't be the only one to assume the minimum was the total. Make sure you distinguish between the two to avoid racking up debt unknowingly.

Potential Damage to Your Credit Score

Using your card thoughtfully and purposefully can be great for bettering your credit score, but it can do the exact opposite if you're not prepared to make the repayments on time! Being realistic about how much you can pay back at a time is imperative. Overestimating your ability to get on top of what you owe can tarnish your record and make it difficult to take out a more significant loan in the long run.

What’s the Verdict? Will You Be Signing up for a Credit Card?

Some couldn't live without them, while others have very little use for them. Whatever your thoughts are about credit cards, it's important to dig deeper into how they work to decide if they're worth your time.