Another day, another “free” credit card offer found in the mailbox. It’s hard to resist the freedom and opportunities that come with owning a credit card; however, without understanding how credit cards can affect your finances, their disadvantages can quickly strip away any advantage they may have had.
The basic premise of a credit card is that a business entity or issuer (usually a bank or financial institution) is actually paying for the purchase. You, the user, are promising to pay the credit card issuer not only the purchase amount of the goods or services, but also any interest or fee the financial institution charges you for the privilege of using their money. This arrangement allows consumers to make large purchases and pay for them over time, or to consolidate their purchases using a single purchasing and payment source.
Some credit card companies offer a rewards, cash back or points system for making purchases. Credit cards are flexible. They can be used in stores, online, or over the phone. That flexibility increases your purchasing power by giving you the freedom to buy what you want, when you want, within the limits of the card you are using.
Credit card companies issue monthly statements to ensure consumers are aware of payment due dates and amounts. This statement is also your journal of purchases and can help you keep track and stay informed about your personal spending habits. Additionally, by reviewing your statements each month, you are more likely to notice any irregular or fraudulent charges. If fraudulent purchases are made using your credit card, you can dispute them and get whatever charges were fraudulently made credited back to your account. Why? Because the credit card company actually paid the merchant and has the legal authority to dispute the purchase. That’s the difference between a credit card and a debit card issued by your bank. A debit card uses your money from your bank account and you are responsible for disputing any fraudulent charges.
Owning a credit card will help you establish a credit rating -good or bad, which you need to have when applying for a loan, a mortgage, or a lease. There are three major credit rating agencies (Equifax, Experian, and TransUnion) that assess consumer’s credit history and ability to repay loans. These independent credit scores should not be confused with a FICO score, which is a rating tool used in the determination of mortgage loans, but is usually displayed on your credit report.
When most people use a credit card, it is for larger purchases for which the consumer is not able to pay for right away. However, credit cards can be a quick road to financial disaster, leading to excessive spending and living above one’s means if not used properly. When you can’t pay off what you have charged on your card, it may become easier to rollover the remaining balance from month to month. This amount doesn’t go away and will keep increasing – even if you stop spending. The interest charges and fees will continue to add to the total you owe.
Deciding to own and use a credit card means you must be a prudent and responsible consumer. Like most financial tools, it is important to remember that there are advantages and disadvantages to using a credit card when making a purchase. Credit cards provide consumers an easier, more convenient way to make purchases and may have a place in your personal finances. When deciding to use a credit card, ensure you have a valid reason for the purchase, a plan for repayment, and an understanding of how using your credit card will benefit your personal financial position.
Jonathon Rowles Captain, USMC (Ret.)
Disclaimer: (have to do it) – This blog should not be considered financial, investment, legal or tax advice. Consult your licensed financial professional, tax advisor or legal counsel. This blog is for educational purposes only.