The Dangers of Mismanaging Credit Cards
A credit card provides many advantages to its users. While they are widely used all over the world, the truth is that there are legitimate reasons why you should avoid credit cards. In part one, we discussed all the benefits — now, let’s look at the cons of owning a credit card.
Credit Cards Can Negatively Impact Your Credit Score
Owning a credit card will influence your credit score. It will have a positive impact if you consistently pay what you owe on-time every cycle. It’s only when you fail to make the deadline that it becomes a problem. When you don’t pay the minimum balance, your credit score will go down, in some cases by as much as 50 to even 100 points. This can quickly become a cycle that’s difficult to get out of.
This is important to keep in mind because having a higher credit score comes with more opportunities to affordably borrow money in the future. The most notable example would be when you are buying a house. A good credit score allows you to borrow at better interest rates and more advantageous terms, giving you a better chance of buying the home you desire.
Meanwhile, if you have a bad credit score, it limits your options, and you’ll also pay more in interest. This is because a low score means you are a higher-risk borrower to the credit card company, and lenders offset these sorts of risks by increasing interest rates.
A Credit Card Makes It Difficult to Control Your Budget
Even if you have the willpower you can boast about, having a credit card is one temptation that is difficult to resist. After all, it provides you with the option to buy something even if you don’t have the money yet. It promotes impulsiveness, which can negatively impact other parts of your life. You may lose money meant for other things because all of it goes to paying off your credit card.
Without a credit card, you may not be able to buy that new collectible or gadget, but at least you won’t be getting into debt. Having that extra control can mean all the difference when it comes to getting big-ticket items, like a car.
It Adds More Debt to What You Already Owe
The average adult will face the hard reality of debt from a young age. Along with basic necessities, they may have to pay for a car and a college degree, which is typically unfeasible without taking out loans.
If you’re still paying off debts from when you were younger, adding a credit card can leave you strapped for money constantly. You may overestimate your payday and not account for your obligations. During an emergency, you may have to miss payments and get deeper into debt.
Interest Rates Are an Additional Cost You Don’t Want
One of the main reasons credit cards are expensive for borrowers is because of the interest rates. Interest is how lenders earn the revenue they need to continue offering loans. For each dollar you borrow on credit, the card company expects you to pay it all back, plus an additional fee for interest if you carry a balance from month to month. Even if you have a low-interest rate card, that small amount can add up.
For example, if you buy a $1,000 item on credit and only make minimum payments, you will end up paying much more than the price tag. Given an 18% interest rate, you would have to pay $175 more for a total of $1,175. If you miss a payment, that interest can accrue, increasing what you need to pay.
The Debt Will Only Weigh on Your Mind
Knowing you have debts to pay is never a good feeling. It will often stay on your mind while you’re doing other tasks. It can lead to feeling distracted and can rob you of peace. You might find yourself stressed, anxious, worried, and desperate. You’ll find yourself thinking about late fees and the amount you still owe more than you care to admit.
When you buy something with the cash you have, you can get what you want and have peace with it. You’re only buying what you can afford to. Aside from that, you won’t have to worry about paying additional costs through fees and interest rates. It’s a major con of owning credit cards, and it’s something to consider before applying for one.
The Universal Default Clause
Credit card companies have the right to raise your interest rates if you make a mistake. It’s a clause you sign up for when you apply. For example, if a missed payment gets reported to the bureaus, your credit score will go down. After multiple missed payments, the company will typically consider you a higher-risk client and increase interest rates.
It can catch you by surprise if you’re unaware of this. Some people have experienced a 30% increase in their interest rates in a short time.
Accounting for that, you may not want to own a credit card considering they can charge you whatever they want. If you’re risk-averse, it might not be the option for you.
There Are a Lot of Fees to Pay
As mentioned, credit card companies make a significant amount from the interest rates they charge. However, that’s not the only way they get income. They can charge fees for the convenience of using their services. On top of that, you’ll pay if you are late with payments or go over the limit. Some also charge an annual fee, a membership you need to pay to maintain the card.
The bottom line is that nearly everything you do with your card will come with a price to pay. Some examples include:
Using a credit card abroad
Transferring your balance to another card
Taking a cash advance at an ATM using your credit card
If you want to own a card, make sure you know all the fees involved and how to navigate them. It can be surprising if you’re not aware of them.
The Contract May Put You at a Disadvantage
Credit card companies do their best to protect their interests since they’re dealing with large amounts of money. One way they do that is when they offer you the contract. The fine print tends to be small and convoluted intentionally so that you won’t have to bother reading it. However, it’s in your best interest to find out the conditions of getting into business with them.
Some will place terms there that they can adjust interest rates when they want to, only giving you short-term notice before the change. Others will have you sign to remove your right to pursue any form of litigation against them. There may be many conditions hidden there, so always take your time before signing the paper.
Credit Card Problems Can Affect Your Relationships
Money has a tendency to affect relationships. In this case, if you’re getting into debt, you’re not only risking money but also those around you. It could get heated when your loved ones find out that you’ve gone over budget or you’ve accrued lots of debt. The stress can add up and strain connections you hold dear.
When it comes to credit cards, discipline will help maintain your relationships. Always set a budget and talk to your loved ones when using your credit card. If you don’t want to take this risk, though, then it is better to avoid credit cards.
You Have a Tendency to Be Impulsive
One factor that often isn’t considered when it comes to credit cards is personality. While some have exceptional self-control, others might struggle to avoid unnecessary purchases. For example, a self-disciplined person may feel the urge to get takeout, but they decide to eat at home instead to save money. Meanwhile, a more impulsive person might feel the urge to get takeout and get it regardless of the current state of their finances.
Ultimately, credit cards give you the power to make these impulsive purchases, at least until you max out your account. If you feel like you won’t be able to control yourself with one, then it is typically better to avoid credit cards altogether.
The Bottom Line
Credit cards have many advantages, like giving you the flexibility to help during emergencies. They can help build your credit score and bring various rewards. However, with the benefits also come risks. You could deal with stress, debt, financial pressure, and more.
If you want to get a credit card, you should weigh the pros and cons. It’s up to you to see if your capabilities match the demands cards bring. If you do get one, make sure that you are prepared and have the discipline to manage your card wisely.