While having a credit card provides numerous advantages, especially in terms of convenience, it also has its share of disadvantages. The ease of spending and buying things you need or want can also result in easily falling into debt. Most people tend to overlook that a credit limit is not the amount of money you have to spend, but an amount of money the credit card company trusts that you will be able to pay back.
This bad habit of treating available credit as available cash leads us to the first disadvantage of having a credit card.
The Spending Habit
With available credit, you can fall into the trap of pushing purchases to the limit. Imagine you have $1,000 left on your credit card. If you view that as money you can spend, you can quickly spend yourself into debt. For example, let’s say you come across some electronic gadget you’ve been wanting to buy for yourself for quite some time. You’ve resisted spending the money for so long, but you really want it. Now, it’s on sale for $250. With that $1,000 of credit available, it’s no big deal to charge that $250, is it? You’ll still have plenty of available credit.
But, do you have $250 to pay for it? Will you have $250 (plus money for your regular payment) by the time your credit card payment is due? If not, how long will it take you to pay it off? How much will you end up paying in interest charges?
If you do the math, you might discover that getting the gadget for $250 was no bargain at all. It could even end up costing you more than the regular price for the item!
Most people, however, won’t do the math. Instead, they’ll see that they still have $750 of credit available. No cash left in your wallet? Checking account running low? No problem, as they simply adopt the attitude of “Just charge it!”
Once they do that, that $750 can soon be gone as well. So, instead of charging only $250, which they already could not afford, they’ve now reached their credit limit and owe $1,000 they wouldn’t have otherwise been able to spend had they had to pay with available cash.
Then, the payments they could afford are now higher as the minimum payment for the higher balance goes up, along with increases in interest charges. So, now they will struggle to make regular payments as well as pay off their new debt—all because they couldn’t resist spending money they didn’t really have!
Only charge things on your credit card that you know you will be able to pay off quickly. If you can pay off your credit card balance each month, you are doing well. If you are carrying an unpaid balance from month to month, it may be time to take a better look at your spending habits.
Hurting Your Credit
If you get caught up in credit card debt, that can end up hurting your credit. So, if you try to get a home or car loan, you might end up paying higher interest rates than you would have had you had a better credit rating.
Late payments, less than minimum payments, missed payments and carrying large balances could all result in a lower credit rating. Instead of ending up paying higher interest rates, you might end up not being able to get a loan at all if they believe you are already over-extended on credit and not likely to be able to take on additional payments for a loan.
And, the worse your debt, the harder it may become to make those payments, which may result in hurting your credit even further. Additionally, late or missing payments could result in your interest rate increasing, often by a large amount. Soon, everything can spiral out of control, and you can end up paying more in interest, which may make it harder to pay, which may in turn lead to more late or missed payments, which themselves could result in late fees and other charges.
Getting Confused by the Terms and Conditions
Another thing that is frequently overlooked or misunderstood are the terms and conditions on the credit card. Frequently, people don’t even look at them closely or, if they do, they become confused by them. This can lead to using the credit card in ways that end up costing you more.
In the terms and conditions, you will likely find information on stuff like what late fees will be charged for late payments or by how much your interest rate might increase under those circumstances.
Don’t forget to look up things such as the grace period for purchases. For example, your credit card statement may come monthly, but the grace period may only be for twenty days. That’s something people frequently overlook.
It is important to carefully read the terms and conditions of your credit card, especially prior to use. It may also be useful to read them on occasion—especially when they’ve updated them—just to serve as a reminder so that you will continue to use your credit card responsibly. Read them and do your best to understand them, calling customer service if you are left with any questions.
The Bottom Line
While credit cards have their advantages, be sure to understand the disadvantages as well. Understanding problem areas can help you to avoid them. What may be most important of all is to develop a plan and a budget and stick to them! A lot of problems can be avoided by simply setting and adhering to a budget.