The Pros & Cons of Credit Cards
It feels like there will be forever a debate as to whether or not credit cards were a fantastic invention or they are the Devil masked in plastic. Whichever side of the fence you sit, there will be pros and cons for each. Some will say credit cards will send you broke, while others refuse to use any other mode of payment other than their magic plastic.
My personal view is that credit cards - if used responsibly (paying in full every month) - are a great tool and can help you save thousands on travel, accommodation, rentals, and much more. But I won't let my bias interfere with an objective summary of some of the biggest pros and cons.
To make it super simple for you guys, I've created a list to highlight the top positive aspects while clearly mentioning some of the downsides and placed them in order from top to bottom.
THE PEAK OF THE PROS
PRO #1: Build a credit history
Applying and getting a credit card early in your financial journey is one of the best ways you can start to build up your credit history. While it's not a "must have" to build history, it can certainly speed things up. A big part of your credit score is determined by how consistently you make repayments, so proving that you can consistently make repayments goes a long way in building your credit history.
PRO #2: Accepted almost everywhere
The big 3 of Visa, Mastercard and American Express can be used all across the developed world. I'm willing to bet that at least one of these three would be accepted at any merchant that has a place to tap your card. And if you're the type of person who hates carrying cash around (like me), it's super convenient! Great for larger purchases too.
PRO #3: Rewards
This is probably my favorite part of using a credit card for everything. You can rack up an enormous amount of points for spending in certain categories such as groceries, dining, gas, etc., depending on the conditions stated for your card. Points can be used to pay for airfares, accommodation, statement credit, or a range of other things. Depending on what card you have, it can also get you VIP access to certain events, airport lounge access, or even top tier status for some hotels.
PRO #4: Booking accommodation
More and more online retailers are now starting to accept debit cards as a payment method, but it is still super difficult to make a reservation for a hotel without a credit card in your name. The first thing the front desk asks you is "credit card, sir" when you check in, and if you try to use a debit card or cash you receive a blank look of "I've never done it that way before". Most hotels are set up to only accept credit card payment to cover incidentals. There are ways around it but it can be tricky.
THE BIG BAD CONS
CON #1: Buying what you can't afford
A lot of folks have the mindset if the money is available to me, it's mine to spend. This is the number one most dangerous aspect about owning a credit card and can lead to a spiraling mess of seemingly insurmountable debt. Most cards have an "available credit" of some amount. $2, $5k, $10k, or whatever. It becomes super easy to purchase things right up until you hit your credit limit without a strategy to pay it all off. Habitual overspending on things you couldn't pay for in cash is a recipe for disaster.
CON #2: Freakishly high interest rates
This point backs onto the one above. Credit cards will start costing you money in interest as soon as you start carrying a balance from month to month, meaning you haven't paid what you owe in full. This interest is what's known as APR or Annual Percentage rate, and can be up to 30% in some cases! So if you have a balance of $2k with a 30% APR and only make the minimum repayments it would take you 12 years to pay off and cost you close to $5000 !!!
CON#3: Super easy to sign-up for
We live in a digital age where we can get almost everything with the tap of our fingers on a mouse or touchscreen. The marketing world knows this and they're very good at their job. Bright, shiny adverts pop up with an elegant sign up form with minimal information required. It's nearly too easy to do. You can get lured into signing up for something that you aren't even sure what it fully means. It's important to read the fine print and know your WHY when looking for a product, especially a credit card. Do comparisons, shop around, ask questions. Don't just sign up to the first thing you see and don't just get something because your friend said it works great for them.
While a lot of credit cards can come with a $0 annual fee, some of the cards that offer greater rewards and benefits can cost upward of $500 a year. Keep in mind that the more expensive the credit card is doesn't necessarily translate into it being a "better" card. It all depends on how you plan to use it. If you're a frequent traveler in and out of airports all year then a $500 card with $300 travel credit and access to airport lounges for free could make sense, and it basically pays for itself in the services you get. But it wouldn't make sense for someone who just travels to and from their local grocery store every week. Be sure to know what your paying for if you opt for a card that comes with a fee. My rule of thumb is if the card doesn't pay for itself in the benefits/services you receive, it's probably not worth it.
Credit cards certainly have a bad reputation for "costing you money", but when used responsibly, the pros far outweigh the cons and won't cost you a cent in interest. That being said, if you find yourself struggling from paycheck to paycheck or have made budgets you can never stick to, taking on a credit card might not be the best idea at this time in your life.
Building the basic financial literacy skills required to handle money well is the best way you can prepare yourself to be able to handle a credit card and reap all of the benefits that come with it. Educating yourself about budgeting, expense tracking and debt management will save you thousands of dollars over your lifetime and set you up for building long term wealth.
Blake - FIRE with a family