As the saying goes, if you can’t pay cash, don’t buy it. However, not everyone follows this smart financial advice. Many people find it difficult to resist the temptation of having credit cards. Credit cards are a convenient way of shopping, especially today when online shopping normally requires payment by credit card.
Many credit card companies charge extremely high-interest rates. So not only are you paying for the items or services you have purchased plus the associated sales taxes, but you will also be paying interest if you don’t pay your credit card balance in full each month. Depending on how long it takes you to pay the credit card off, you could literally be paying thousands of dollars in interest.
Introductory Low-Interest Rate Offers
To drum up a new business, many credit card companies will offer very low introductory interest rates. This is to entice new customers to either apply for the credit card and use it right away, or possible transfer balances from other higher-interest credit cards.
Read the Small Print
It is very important to read the small print on these special offers as quite often, the introductory interest rate is for a short period. After this introductory interest rate period is up, the credit card company will then charge their normal interest rates. Therefore if you do not pay off the credit card in full before the expiry of the offer, you will once again be paying high-interest rates.
Purchasing items and services with a credit card is so easy to do. You don’t see physical money going out of your wallet at the time. This can be very dangerous for many people. Credit card use tends to lead to excessive spending, as you are essentially spending money you may not have. Credit card spending can get out of control very easily, and before you know it, you are in debt over your head.
Financial Management and Discipline
Some people have no problem with discipline when it comes to making credit card purchases. They tend to stay within their means and not overspend. However, this is not the case for everyone. If you have difficulty controlling your spending habits and managing your money correctly, credit cards are not the way to go. It is far easier to manage cash in hand and spend according to what you have.
Numerous Credit Cards
There are so many credit cards available today. Not only do banking institutions offer credit cards, but they are also available at box stores, store chains, gas stations, cell phone companies, and many more. You could quite literally have a credit card for every place you shop. The more credit cards you have in your possession, the more dangerous it can be.
Even if the majority of your credit cards have lower limits, they certainly all add up. Keep in mind; if you cannot pay them off in full each month, you will at least have to make the minimum payments on them to keep them in good standing. These monthly payments, along with your other monthly bills, can add up and get out of hand quite easily. When you have too many credit cards, this can also hurt your credit score.
Making The Minimum Payment
If your credit cards are getting out of hand and you cannot fully pay them off at the end of the month, making minimum payments can take years to pay off the credit card in full. Many credit card companies only require the interest amount to be paid as a minimum payment. Therefore you are never making any payments towards the principal amount you owe. This can make it difficult to pay it off at all.
Did you know every time you apply for a credit card, your application goes onto your credit report. It doesn’t matter whether you have been approved or denied for the card; it can still have a negative impact on your credit score.
It is best to keep your credit card applications to a minimum, as applying for several in a short period also affects your credit score.
When you are late making payments or do not pay enough on your credit cards, this directly affects your credit rating. This can create difficulty if you plan on applying for a mortgage, as your credit rating has a direct impact on the approval process and the interest rate you would receive.
Your credit rating not only provides information about your credit and loan accounts; it also is an indicator whether you are a high or low-risk borrower.
Credit Card Limits
Most credit cards have a preset limit to the credit that is available to you. This limit is the maximum amount you can spend on the credit card. What some people don’t understand is if you max out your limit, this can make you look like a high-risk borrower. This can negatively affect your credit score.
As a rule of thumb, it is best to keep your balance on your credit card below 30 percent. Going over the limit of the maximum amount on your credit card directly affects your credit score/rating. This shows you are not a responsible borrower.
The company which issues you your credit card makes regular reports major credit bureaus. There are three major credit card bureaus. They may report to one or more of them. The information they provide to the credit card bureaus are:
- The date the account was opened
- Credit card balance
- Credit limit
- Payment History
- Account Status
All these factors will affect your credit score.
When you use credit cards online, you are very susceptible to fraud. Using your credit card for electronic payment methods are not always secure. If you own a credit card and physically lose it, it can be used before you even realize it’s missing.
Many credit cards today have the “tap” feature where no PIN is required to make a purchase. Owning a credit card and using it for electronic purchases or physically losing it can also put you at risk for identity theft.
The best solution regarding credit cards is to not own one. Always pay cash when you can, or simply do without.