A credit card is a great payment tool for us as it carries many benefits. It allows us to spend money in advance and pay the bank on a billing cycle. I am sure that you have witnessed how easy it is to use a credit card to pay for something that you want and you don’t have to carry lots of cash with you.
But I am also sure that many of you have heard stories about how someone went broke because of credit card debts. So, is a credit card a good or bad thing for us? I bet that your parents would have told you stories about how many people went bankrupt because they couldn’t pay off their credit card debts, which is why I want to share more about credit cards.
What Exactly is a Credit Card
A credit card is essentially a card that allows you to make payment instead of cash when you purchase something with the concept of “buy now, pay later”. This means that you would be able to buy things with just the card as long as your total spending for the period does not exceed the credit limit then you are free to use the card.
The credit limit is actually derived from your income, credit score, and also credit history. All these would determine how much the bank is willing to let you lend using your credit card. Essentially, credit cards are actually a short term loan from the banks as they only bill you at the end of the billing cycle. The important thing is that you have to ensure that you pay off the bills on time so that the interest will not take place. Trust me, you will not want to pay your credit card loans late!
Bad things about using credit cards
- Leads to more impulse buying
With credit cards, you would most likely be blinded by the fact that you are able to pay for things later. This causes you to be more tempted to spend on things that you don’t actually need and this racks upon the amount that you owe the bank. I am sure that all of us are guilty of this when we first get our credit card as it just feels good to tap/swipe our credit card and leave the store with the things we bought. With you owing the bank more money, it may make it harder for you to pay the credit card bill and late payment will cost you even more.
- Crazy interest rates
What happens when you fail to pay your credit card bills on time? Interest rates come in as the bank would charge you for not being able to meet the billing requirements. The interest rate can be as high as 20% and it runs on compound interest rates. This means that you can be in huge financial trouble if your credit card bills snowballs and the interest rate will end up making you go bankrupt. This is why you must make sure that you take good care of your credit card bills and ensure that you will never accumulate any outstanding credit card loan.
- Affects your credit rating
If you fail to pay your credit card loan, your credit score will be affected greatly and it can lead to many other different problems. It will be harder for you to get a loan from a bank since they would assess you as someone with a higher risk of defaulting and this may cause your interest rates to be higher. This means that it could be harder for you to get a house, car, or even start a business as loans would be harder to be approved with your low credit rating. Some employers also look at your credit rating and if it is low, they may not be willing to hire you as well as it shows that you are not a responsible person.
- Identify thefts
With the growth of online shopping, people can purchase things online using their credit card details. This opens opportunities for hackers to steal your credit card details and spend money using your credit card. It is important that you ensure that the website you are visiting is safe and secured and you shouldn’t share your credit card information with anyone. There have been many cases of identity theft where the offenders would use the credit card information and purchase a lot of things online.
Why should you use a credit card then?
- Attractive incentives of credit cards
Credit cards give you many types of rewards when you purchase goods and services using the cards. Cashback for example is an incentive that people love as you get some money back from buying something. This encourages people to buy more using credit cards as they can earn cashback which may make things more affordable for consumers.
There are also other types of incentives such as discounts, these discounts are usually for the gas station or some retail stores. By having such discounts, people are more likely to pay using credit cards as it allows them to pay a lower price for the goods or services.
- Building credit score
Just like the cons of having a credit card, your credit score can be affected both ways by credit card usage. If you have no credit score or you want to improve your credit score, your history of being able to always pay your credit card bills on time would help to improve your credit score as it shows that you are able to take care of your loans well.
- Can use anywhere
Credit cards are more widely accepted in the world, as they can pretty much be used anywhere. Debit cards are less versatile as countries may not accept them as much as they would accept a credit card. When you go to other countries, it is likely that you would need a stay and hotels would be able to help you with the process by using your credit card. All hotel wants customers to pay using credit cards as it is easier to charge customers for any damage they caused in the rooms.
- Safety
Having a credit card can also mean that the bank would protect your card. When someone uses your credit card to make a lot of purchases and end up owing a lot of money, the bank would protect you as they would not charge you for the things that you did not buy yourself. They will instead help you investigate and see what happened, you just to report to them and they will take care of it for you.
How to manage credit card bills?
- Pay your bills on time
To avoid paying late fees, interest charges, and getting poor credit scores, I can’t emphasize enough that you must always ensure that you pay your credit bills on time. A lot of people end up owing banks a lot of money because they keep forgetting about the credit card bill every month. If you always miss the payment dates, you will be charged a few hundreds of dollars and you will also have a lower credit score.
You can void this problem by using a calendar and set reminders to ensure that you are paying on time.
- Keep your balance low
It’s a simple logic to keep your balance low so that you will not be worried about not being able to pay on time. You simply have to ensure that you budget your spendings well such that you are able to pay the bill on time. This allows you to have a better credit score as you are able to maintain by keeping the balance low and paying them off.
Generally, you should only spend about 20% of your credit card’s limit. For example, if your limit is $1000, you should be aiming to only use $200 using that card so that the chances of your spending over the limit are zero and you would most likely be able to handle the bills better.
- Monitor your monthly statement
Monitoring your monthly statement gives you a lot of information such as what you spent on, how much you spent, and if the charges are correct. This allows you to see and think if the usage of credit cards this month is acceptable and this would wake you up if you have been spending too much. You would then prepare yourself and eliminate the spendings that are not needed for this month. This allows you to have a better sense of how to manage your money as you would be able to tell the things that you could have not bought and how you could have lowered the amount outstanding.
