Credit cards give us the freedom to make purchases when we are in a pinch and have no other means. In this instance, it is easy to just swipe your card and go. This can be extremely helpful when you need some extra cash in a hurry.
They may also raise your credit score. This is dependent upon the usage, balance, and payment history. A good credit rating is very helpful in purchasing a home or vehicle. You must be sure to keep your balance low and pay on your card every month or this can be detrimental.
Furthermore, there may be membership benefits for the card. This may range from money back to discounts on later purchases. This can extremely beneficial if you are paying off your card every month and your benefits outweigh your interest paid. It isn’t beneficial if you are simply collecting a reward that you are basically paying for in interest.
They may also help when you are in a dispute regarding a purchase and having trouble working it out. This may be one of the best benefits of using a credit card. They can handle these sticky situations.
Credit cards can be like a Siren in the night, calling out to unsuspecting victims. We see a new couch, clothing item, or that new toy we just have to have. What do we do? We reach in our pocket and go for it. We feel wonderful and don’t realize that we have just bought something that we can’t really afford or that will cost us a ton more in the long run.
Cards often have a high interest rate. Therefore, the extra money that we are putting into our card every month could have been going into our investment accounts or Safety Net. Now, here is the kicker. Not only are we paying extra for an item, but we are also losing the potential for return on our investment. Let’s analyze the situation for a moment. Assume we purchase our item for $1,000.00 and have a 15% interest rate. Looking back at Credit Score Assassination, we remember that we paid an additional $580.00 over 6 1/2 years. Had we invested the additional money, at an 11% APR for an index fund., the same $580 would have become $1084.00 over 6 1/2 years. We are not quite finished. Now we have to remember that we lost $580.00 and would have gained $1084.00. The net loss is $1664.00! At that rate, plus the cost of the item, you could have bought 3 items for the same price.
Credit card purchases can also be detrimental to our credit rating. As mentioned earlier, when we pay every month and we keep our balances low, there can be an advantage. The inverse is true if we miss a payment or we are sitting over 85% of our max balance. Now, we are going to see a potentially large drop in our credit rating that can be devastating for multiple years.
In conclusion, we must ask ourselves. Which person am I? Am I the type of person that pays off my credit card debt every month and can take advantage of the benefits? If the answer is no, then you need to think very seriously if a credit card is right for you.