Advantage and Disadvantage of Credit Cards Essay
* Purchase Power and Ease of Purchase – Credit cards can make it easier to buy things. If you don’t like to carry large amounts of cash with you or if a company doesn’t accept cash purchases (for example most airlines, hotels, and car rental agencies), putting purchases on a credit card can make buying things easier. * Protection of Purchases – Credit cards may also offer you additional protection if something you have bought is lost, damaged, or stolen. Both your credit card statement (and the credit card company) can vouch for the fact that you have made a purchase if the original receipt is lost or stolen.
In addition, some credit card companies offer insurance on large purchases. * Building a Credit Line – Having a good credit history is often important, not only when applying for credit cards, but also when applying for things such as loans, rental applications, or even some jobs. Having a credit card and using it wisely (making payments on time and in full each month) will help you build a good credit history. * Emergencies – Credit cards can also be useful in times of emergency.
While you should avoid spending outside your budget (or money you don’t have! ), sometimes emergencies (such as your car breaking down or flood or fire) may lead to a large purchase (like the need for a rental car or a motel room for several nights. ) * Credit Card Benefits – In addition to the benefits listed above, some credit cards offer additional benefits, such as discounts from particular stores or companies, bonuses such as free airline miles or travel discounts, and special insurances (like travel or life insurance. While most of these benefits are meant to encourage you to charge more money on your credit card (remember, credit card companies start making their money when you can’t afford to pay off your charges! ) the benefits are real and can be helpful as long as you remember your spending limits. Disadvantages * Blowing Your Budget — The biggest disadvantage of credit cards is that they encourage people to spend money that they don’t have.
Most credit cards do not require you to pay off your balance each month, so even if you only have $100, you may be able to spend up to $500 or $1,000 on your credit card. While this may seem like ‘free money’ at the time, you will have to pay it off — and the longer you wait, the more money you will owe since credit card companies charge you interest each month on the money you have borrowed. * High Interest Rates and Increased Debt — Credit card companies charge you an enormous amount of interest on each balance that you don’t pay off at the end of each month.
This is how they make their money and this is how most people in the United States get into debt (and even bankruptcy. ) Consider this: If you have a $100 in savings, most banks will give you at the most 2. 0 to 2. 5% interest on your money over the course of the year. This means you earn $2. 00 – $2. 50 a year on your $100 savings. Most credit cards charge you up to 10 times that amount of interest on balances. This means that if you have $100 balance that you don’t pay off, you will be charged 20-25% interest on that $100.
This means that you owe almost $30 interest (plus the original $100) at the end of the year. A good way to look at this is in comparison to what you would earn in interest from a bank or owe in interest to a bank loan: Savings accounts may pay you around 2% interest; if you have a loan from a bank you may pay them around 10% interest (5 times as much as you earn off your savings); if you owe money to a credit card company, you may pay them around 20% interest (10 times as much as you earn off your savings. * Credit Card Fraud – Like cash, sometimes credit cards can be stolen. They may be physically stolen (if you lose your wallet) or someone may steal your credit card number (from a receipt, over the phone, or from a Web site) and use your card to rack up debts. The good news is that, unlike cash, if you realize your credit card or number has been stolen and you report it to your credit card company immediately, you will not be charged for any purchases that someone else has made.
Even if you don’t realize your credit card number has been stolen (sometimes you might not know until you receive your monthly statement), most credit card companies don’t charge you or only charge a small fee, like $25 or $50, even if the thief has charged thousands of dollars to your card. There are several things you can do to prevent credit card fraud: * If you lose your card or wallet, report it to your credit card company immediately. * Don’t loan your credit card to anyone and only give out your credit card information to trusted companies or Web sites. Check your statement closely at the end of each month to make sure all charges are yours
. * You can find out more about protecting your personal information by visiting our Personal Safety course. Credit cards can make life easier and be a great tool, but if they aren’t used wisely they can become a huge financial burden. If you do decide to use credit cards, remember these simple rules: * Keep track of all your purchases. * Don’t spend outside your budget. * Pay off your balance on all of your credit cards at the end of each month. Don’t loan your credit or give out your credit card information to anyone but reliable companies. The advantages and disadvantages of credit cards By Clare Francis, last updated 01 November 2012 Use a credit card well and you can borrow for nothing, get extra protection on your purchases and possibly even reward points or cashback when you use your card. But, use a credit card unwisely and you could end up paying lots of interest and racking up a debt you struggle to pay off. So what are the pros and cons of credit cards? Quick way to borrow
If you need to buy something expensive that you can’t afford to pay for all at once, a credit card is ideal. If you don’t have the cash to hand – or even in your bank account – you can pay with a credit card and then spread the cost over a number of months. Credit cards are also an easy and secure way to pay for internet shopping. Plus, they are widely accepted around the world. Consumer protection You get more protection if you pay with a credit card than if you pay with a debit card, cash or cheque. If you buy something between ? 100 and ? 60,260 you will get your money back if it all goes wrong.
In other words, if the company goes bust, or your purchase is faulty or doesn’t turn up, you won’t lose out because you can claim the money back from your credit card provider. Promotion You’ll also have protection if your card is used fraudulently as your card provider should refund the money. You won’t get a refund though if your card provider finds that you were negligent so make sure you don’t write your PIN number down anywhere. Borrow for free Some credit cards offer 0% periods meaning you can effectively benefit from an interest-free loan.
You need to clear your balance before the 0% offer ends though otherwise you’ll be charged interest. The average interest rate is 18% – that’s quite high which is why you should pay your debt off before interest kicks in. Not everyone needs an extended interest-free period, but even if you pay your credit card bill in full each month, you’ll still ‘borrow for free’. You usually get up to 59 days before your credit card bill needs paying and as long as you pay it in its entirety you won’t be charged interest. This can be a great help in managing your cash flow.
Some cards even offer incentives to spend, such as cashback, loyalty points or Avios air miles, which means you could actually make money from your credit card. These are only worthwhile if you pay your bill in full – otherwise the interest you’ll be charged will be more than the value of the rewards. Switch your balance If you owe money on credit or store cards, taking out a new card could actually be a good option. You’ll probably be paying interest rates of at least 18%, but you could cut that to zero by transferring your debt onto a 0% balance transfer card.
There will be a transfer fee to pay of around 3%, but it’s worth it as it will still be less than the interest you’ll be charged if you stick with your existing card. Pay your debt off before the end of the 0% period though as you will then be charged interest on any debt you still have. Beware the debt trap It’s important to remember that a credit card is a form of borrowing. You buy now and pay later – and there are risks. If you don’t pay off your balance in full each month, you will start to rack up interest at a relatively high rate.
Your debt can therefore quickly spiral out of control, particularly if you pay off only the minimum monthly amount. You should therefore always try to pay more than the monthly minimum and you should think of your credit card only as a short-term borrowing facility. Hidden costs The interest rate is not the only cost of a credit card. A fee will be charged if you are late making your monthly payment, or miss it altogether. You’ll also pay a penalty if you exceed your credit limit. So make sure you keep track of your spending and always pay your bill on time.
And don’t be tempted to withdraw cash on your credit card. Most card firms charge a fee to withdraw cash from an ATM, typically about 2%. You will also start to rack up interest immediately as there is no interest-free period on cash withdrawals. Pick the right card Make sure that you pick the right card otherwise you could end up paying more than you need. If you’ve got an expensive time coming up, maybe you’re moving house or planning a wedding, you should look for a 0% purchase card. et extra protection on your purchases and possibly even reward points or cashback when you use your card If you need a new card because you’ve built up expensive debts on another credit card, it’s a 0% balance transfer offer you need. MoneySupermarket’s free independent comparison service can help you to find the right card by quickly comparing hundreds of deals on the market. To find out which cards you’d be accepted for without affecting your credit score, try our quick and easy card search. We’re free, independent and compare all UK credit cards as well as offering exclusive deals you can’t get anywhere else.
Considering if investing in a credit card is a smart decision for you? Money MindEd is here to help you determine if now is the right time to invest. Here is our list of advantages and disadvantages to owning a credit card. Advantages: Building Credit: The greatest advantage that comes along with proper credit card use is building a good credit history. Credit is based on how long you have had credit and how reliable you are with making monthly payments. Starting to build credit early as a teenager or college student can help you in the future when you need a loan.
In Case of Emergency: Having a credit card can serve as an advantage in the event of an emergency. A credit card can help when you suddenly have to pay hundreds of dollars to have your car repaired. It will give you extra time to save up and pay for any charges. Education: Having a credit card as a teenager or college student can teach you a lot about financial management, especially the importance of paying bills on time. Getting a head start on managing your money now will only help you in the future. Disadvantages:
Spending Temptations: Making purchases with a credit card can feel as though you are not even spending money, you do not have to hand over cash nor is the amount taken out of your account. Instead you receive a bill with the total of your purchases at the end of the month, which may be more than you were expecting. Not being able to pay off your credit card bill at the end of the month can lead to debt, late fees, and bad credit. Credit Card Fraud: Having a credit card means a possibility for your account information to be stolen, allowing someone to make purchases on your credit card without your knowledge.
It is therefore important to monitor your account to ensure that there are no unfamiliar charges. Interest Rates: Making large purchases on a credit card beyond what you can afford for a month can cause you to pay much more than you planned. If you decide to make a $300 purchase but cannot pay in full at the end of the month, the credit card company will charge you interest for the time that it takes you to pay it off. Your $300 purchase will end up costing you closer to $350.