Credit cards can be a powerful financial tool offering numerous benefits, from interest-free purchasing to earning rewards and building financial credibility, so long as you avoid the potential pitfalls of convenient consumer credit.
The Good Side of Credit Cards
There was a time when people carried around cash to make purchases, large and small, but doing so was rather inconvenient and prone to loss or theft. Writing checks offered a slight improvement over cash, making it easier, for instance, to make large purchases, but checks are also prone to loss or theft, and they could ‘bounce’ – that is, not clear the bank for lack of funds or overdraw your account. When credit cards appeared in the 1950s, they changed how people shopped and paid for goods. Credit cards allowed stores to expand into mail order, eventually making way for online shopping.
Besides their convenience, using credit cards responsibly can help build a good credit history, improving your future financial opportunities, such as the ability to purchase a house or car at a lower interest rate. Then there are the benefits and perks of credit cards, such as cashback, rewards, purchase/fraud protection, and, if paid off monthly, the ability to borrow money without paying interest.
The Dark Side of Credit Cards
But with the good comes the bad, and one of the most significant downsides of credit cards is the temptation to overspend or give in to impulsive purchases and end up with a balance at the end of the month. In such cases, the credit card companies benefit; as we all know, the interest rates on credit cards are generally north of 20% annualized (compared to a mortgage that is typically a fraction of that interest rate). Furthermore, credit cards charge fees related to cash advances, and some charge fees for enhanced benefits you may or may not fully take advantage of. The danger of carrying a balance and falling into a cycle of debt is a real and scary situation you want to avoid.
Striking a Balance: Responsible Credit Card Usage
Using credit cards and a budget that works for you can be a powerful personal finance tool that makes life easier and comes with added benefits such as purchase protection, cash, retail or travel rewards, and less stress from carrying around a lump of cash or checkbook. However, credit cards should only be used by someone with arms around their budget.
Paying credit card bills (and various other bills, for that matter) on time and in full is easier than ever by taking advantage of monthly auto-pay options to pay your bills. That said, don’t forget to review your credit card bill each month for errors and unauthorized charges or for subscriptions you no longer need or use. And finally, don’t forget to check your credit annually (annualcreditreport.com) to check for errors and fraud.
Conclusion
Credit cards can be a tool for financial empowerment or a destroyer of wealth if not used wisely. Responsible credit card use is a cornerstone of long-term financial success that can lead to good credit, which in turn leads to other opportunities, such as lower interest and other purchases, such as automobiles or a home.
WHWM is here to help you identify your priorities, develop a plan, and adjust along the way. Putting your trust in WHWM means working with WHWM’s Founder and President, Stephen Bodwell, a CFP® professional committed to helping you achieve your financial goals and big dreams. Take the next step towards getting what you want in life. Schedule your complimentary, no-obligation 30-minute consultation today.
Walnut Hill Wealth Management, LLC (“WHWM”) is a registered investment advisor offering advisory services in the State of Texas and in other jurisdictions where exempt. The information provided is as of the date indicated and is subject to change.
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