Rule #1 Finance Blog

With Investor Phil Town

Understanding The Pros and Cons of Credit Cards

The average United States household now carries more than $16,000 in credit card debt.

Can you relate?

While there are some potential advantages to having a credit card, it’s important to understand the long-term consequences that can result from irresponsible credit card use.

By having a better understanding of the pros and cons of credit cards, as well as how to utilize credit cards responsibly, you can make better educated financial decisions.

Pros of Credit Cards (There Aren’t Many)

When used cautiously, credit cards can certainly have their advantages.

Now I want to give you a warning here.

I don’t think you should have a credit card if you can manage it.

I don’t think that there are very many pros to having one.

Keep this in mind always, credit cards are out to make money on your compound interest.

This means you’re losing money. Rule #1 is don’t lose money.

There are WAY more cons to owning credit cards then there are pros, no matter what the credit card companies will have you believe.

If you aren’t responsible with your credit you will get burned and you will end up in debt. If you’re going to own a credit card you need to do it responsibly.

One of the main draws of many credit cards these days is that of the many different rewards programs and incentives they have to offer.

Generally, credit card rewards programs are set up in one of three ways.

You’ll either earn a certain amount of money back, points back, or travel miles back for every dollar you spend.

The rewards can work in your favor if you’re careful and responsible with your spending.

Realistically though, that doesn’t always happen so you have to make sure you’re paying your balance in full every month, otherwise, there’s no point.

When used responsibly, credit cards can be used to build your credit score and establish a credit history.

This is only the case, however, if you understand how credit card utilization affects your credit score.

Never spend more than 30% of your credit limit and never miss one single payment on your card.



Cons of Credit Cards

There are many potential drawbacks to having credit cards—especially if you don’t use them responsibly.

These disadvantages can quickly and easily outweigh any potential benefits.

1. Credit Card Debt is BAD Debt

Unlike mortgage debt (which can be considered “good” debt because it is also an investment), credit card debt does nothing for you.

At the end of the day, it’s always better to invest your hard-earned money than it is to dump it into credit card debt payments.

Unfortunately, once you begin accumulating credit card debt, it can be difficult to dig yourself out.

2. High-Interest Rates

What makes credit card debt so difficult to overcome?

High-interest rates.

While some credit cards may have low “introductory” rates (sometimes as little as 0%), those interest rates can easily shoot up to 20% or more once the introductory period ends.

When you think about it, 20% is a ridiculous amount of interest to be paying on anything—let alone that $5 cup of coffee from your favorite café.

And unfortunately, once you begin to fall behind on your credit card payments (by either missing payments or only making the minimum payment), that interest will quickly accumulate to the point that it becomes insurmountable.

3. They Can Destroy Your Credit

Finally, while credit cards have the ability to improve your credit when used responsibly, they can even more easily and quickly destroy your credit if you’re not careful.

Being late on a payment, missing a payment, or carrying large amounts of credit card debt at once can all seriously impact your credit score.

And with less-than-ideal credit, you’ll have a harder time getting approved for loans.

Even if you are able to get approved for financing, you’ll probably be stuck with high interest rates and other unfavorable loan terms that can keep you in the same endless cycle of debt for years, no matter how hard to work to dig yourself out.

Are you currently working your way out of bad debt? My free Get Out of Debt Checklist will give you the proper steps to break out of bad debt and build a better credit line.

 

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Phil Town is an investment advisor, hedge fund manager, 3x NY Times best-selling author, ex-Grand Canyon river guide and a former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence. You can follow him on google+, facebook, and twitter.
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