Credit card pros & cons
It’s no secret that credit cards have a notorious reputation for being the fastest way to plunge into debt. No doubt you’ve heard plenty of credit card horror stories. You might even have a friend who’s on a debt payment plan to get back on track. But don’t let these things put you off, because if you play by the rules, credit cards can really help you out when you get stuck. Some cards also have perks like free insurances and rewards.
So in this guide we’ll take you through the pros and cons of owning a credit card. And when you’re done reading, we hope you’ll be better placed to decide if this little piece of plastic is worth your while.
1. If you play your cards right, you’ll be rewarded
Banks are always trying to tempt potential customers like you with rewards and incentives like complimentary travel insurance and concierge. This is good news for you, if you build up a good credit rating (see point four) and stick to the rules of paying your balance on time and in full each month. Make it on your terms, and you could be in for some big rewards. If you’re curious to see what rewards credit cards are available at the moment, visit out rewards cards comparison hub here.
2. It’s safer than carrying around cash
How strange would it feel carrying around wads of cash every time you went shopping? One of the perks of having a credit card is that it’s a safer way to shop because credit cards connected to the Visa, MasterCard and AMEX networks offer zero liability policies. This means if your credit card is lost or stolen, you will be reimbursed for any fraudulent activity. Just keep in mind, you’ll generally be required to notify your provider within a reasonable period of time. If you want to learn more about credit card fraud, find out more here.
3. Having a credit card keeps your options open
For online big ticket or spontaneous purchases, having a credit card can make life easier when you don’t have the funds at hand but do have the means to pay it back later. Credit cards are also there to help in the event of an emergency like if you receive an unexpected bill or fine. Having this trusty piece of plastic in your pocket can guarantee you that extra sense of security when you need it the most.
4. You get to build up a credit history, which helps when applying for bigger loans
A clean credit rating is going to add that little bit extra assurance to the banks when you apply for a hefty loan like a home loan. Think of it like a good school report which reflects well on your character and trustworthiness. But of course, you’ll also face the risk of damaging your credit report, which we’ll run through in the cons below.
5. It does the record keeping
Have you ever paid cash for an item that turned out to be faulty, only to realise you lost the receipt? The handy thing about using plastic is the convenience of keeping a record of what you buy to use it as evidence if needed, and also as a budgeting tool so you know where your money is going each month and on what.
But wait for it...here are the cons:
1.Credit cards can cost you money
While credit cards give you the freedom to buy things now rather than later, the banks are going to come out on top if you don’t use your card the right way. That’s because if you don’t pay your balance in full and on time each month you’ll be slapped with having to pay interest on whatever you spend, as well as a late payment fee. To top things off, many credit cards come with an annual fee.
People shop and spend differently, so there are credit cards to facilitate that. Take the black credit card for example, a card for the serious punters. While the plentiful promotions from owning one is enticing, the yearly fee will usually set you back around $400.
On the other end of the scale, there’s the no fee credit card. This type of card has no annual fees, but you need to watch out for the high interest rates and pay your bills on time. If you want to learn more about the various credit cards available including the benefits and disadvantages of each type, read up on it here. And remember, it’s really important to do your research when choosing any credit card, so ensure you read the fine print, so you’re aware of any hidden fees.
2. And having one might just change the way you think about money
Just because your credit card can buy it, it doesn’t mean you should buy it. A study at Cornell University found that people are more likely to buy junk food with plastic than cash, because they cannot part with cash when spending it on vices. If having a credit card around is too dangerous for you, maybe switch it to a different wallet or purse for occasional spending only. That way you’ll be disassociating it from your regular spending habits.
Another option is going for a debit card over a credit card, which allows you to spend your own money not the banks, and also generally comes with the protection of MasterCard or Visa’s zero liability policy.
3. It can hurt your credit rating
The Australian Retail Credit Association (ARCA) has developed a website called CreditSmart to keep credit card holders informed about their legal rights and obligations concerning credit. According to CreditSmart, any “default information and any record of payment of the default will stay on your credit history for five years.” Repayments will also stay on your credit history for two years.
This is something to keep in mind when looking at the crystal ball of your future in terms of housing and leasing applications. After all, you don’t want the debt collectors knocking at your door.
Now it’s time to choose your credit card destiny…
You have read all the pros and cons to help you decide whether you want a credit card, so that means you can go ahead and get one, right? Wrong! The next step is to choose precisely which credit card is suitable for you. Different credit cards have different features, and some might not be relevant or appropriate for your spending style.
So check out this neat article on the types of credit cards there are around. And the best thing is, there are always new credit cards entering the market too. We have an extensive credit card comparison section on our website that crunches all the numbers down into plain English.
Our final piece of credit card wisdom...
If you need more information about what a credit card application process is like, have a read of our lowdown here, and follow these helpful hints for using a credit card the right way.
- Once you have the plastic in your pocket, create a spending budget so you only spend what you know you can repay in full.
- Keep track of your credit card repayments by penning important payment dates coming up in your diary. Or better still, set up automatic repayments to avoid late payment fees.
- Avoid ATM cash withdrawals using your credit card because instead of being charged the purchase rate, you’ll be slapped with the notoriously high cash advance rate which is charged straight away as interest free days don’t apply to cash withdrawals.
- Set up online statements for convenience, the planet, and cost efficiency. Some banks charge a few dollars a year for paper statements, so you may as well save where you can.