Give Me Some Credit: The Risks and Rewards (2 of 3)

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Having a credit card in 2016 feels like a necessity. The majority of Americans carry and use credit cards on a regular basis. Purchases range from everyday items like groceries, to vacations and expensive home appliances. However, just because they’re widely used doesn’t mean credit is 100% safe. In fact, if you aren’t aware of best practices prior to spending, you may find yourself with “bad credit“, burdened with more debt than you can handle, or both.

The Risks

Too many cards

Most of us have received credit card offers in the mail, but you shouldn’t accept every offer you receive. Especially with credit cards.

Carrying multiple credit cards is like asking to be in debt. It’s difficult to manage several balances on many different cards. Additionally, depending on the card, you may be subject to annual fees, which add up quickly. You also run the risk of damaging your credit and your ability to borrow in the future. Transferring balances does not rid you of debt, it simply changes your terms, conditions, and (in some cases) your Annual Percentage Rate (APR). Carrying one or two credit cards will be easier to manage, monitor, and pay off.[1]

Maxing out your card

Spending up to your credit limit will lead to a lower credit score, which can damage your financial future. When determining your score, Fair Isaac Company (FICO) will look at how much credit is available to you, and how much of that you’re using. This is referred to as your “utilization ratio” which is a fancy way of saying the amount of credit you’re using. The less credit you need, the better. People with a high credit utilization ratio will have a lower credit score and may have other financial difficulties.[2] Utilization ratios are like golf — lower is better.

Minimum payments

Credit cards make people feel like they can purchase things they can’t actually afford. The idea of buying something now without having cash on hand is pretty appealing. This causes people to rack up high balances on their cards, then only make minimum payments because that’s all they can afford. This allows the interest to build and leads to being in debt for a longer amount of time (read more in What You Should Know About Interest Rates).

By not carrying a balance on your credit card, you’re ensuring that you’ll pay little-to-no interest, and you’ll keep that utilization ratio low.[1] Check out this minimum payment calculator to see how paying the minimum will really effect you.

Cash advances

Taking out a cash advance through your credit card is not a safe option for quick cash. The average interest rate for a credit card cash advance is about 8.5% higher than the normal purchase interest rate. In addition, the interest on a cash advance will start accruing immediately, whereas with a regular credit card purchase there’s typically a grace period. It may be an easy option, but it could cost you big time.[2]

The Rewards

Rewards programs

Most credit cards today offer benefits and perks to customers. Some offer airline miles based on your purchases, while others may offer 0% interest for a specified time period after you sign up. Most cards also provide cash back rewards programs — your purchases are worth points which can be redeemed for cash. It may take some shopping around to find the rewards program that fits your lifestyle. If you travel a lot, you may want a card that provides airline miles. If not, find a card with a good introductory rate so you don’t have to pay interest for a little while.

Build your credit score

When used correctly, credit cards can actually help boost your credit score. Making payments on time and maintaining a very low balance (or no balance at all) will look good on your credit report and over time could raise your credit score, leading to better options for cards and loans in the future.[3]

Easy to monitor

Credit cards make tracking your spending simple and convenient. Paying with cash can make it difficult to track your spending patterns, but with a credit card you can access all your transactions online in a few seconds. Pay close attention to your charges and transactions so you can easily spot credit card fraud.

Credit cards can be a useful tool when used correctly. Abusing the power of credit cards however, can lead to deep financial issues that take years to solve. Make sure you know what you’re getting into before you decide to use your credit card.

Note: If you’re regularly maxing out your credit cards, or getting denied additional credit, you may consider a personal loan to help get you the cash you need. OppLoans personal installment loans can actually help solve that problem in more ways than one: OppLoans reports on-time payments to credit bureaus which means you not only get the money you need now, but you can actually rebuild your credit over time. Give us a call today at (800) 990-9130 or click “Apply Online” below to find out more!

Read the other parts of our Give Me Some Credit series:


References

  1. Bell, Kay. “10 Worst Credit Card Mistakes” Accessed July 26, 2016. https://www.creditcards.com/credit-card-news/help/worst-credit-card-mistakes-6000.php
  2. Peterson, Lars. “7 Dangerous Credit Card Mistakes You’re Making” Accessed July 26, 2016. https://money.usnews.com/money/blogs/my-money/2015/07/16/7-dangerous-credit-card-mistakes-youre-making
  3. Yuille, Brigitte. “Credit Cards: Pros and Cons” Accessed July 26, 2016. https://www.investopedia.com/university/credit-cards/credit-cards6.asp

The information contained herein is provided for free and is to be used for educational and informational purposes only. We are not a credit repair organization as defined under federal or state law and we do not provide "credit repair" services or advice or assistance regarding "rebuilding" or "improving" your credit. Articles provided in connection with this blog are general in nature, provided for informational purposes only and are not a substitute for individualized professional advice. We make no representation that we will improve or attempt to improve your credit record, history, or rating through the use of the resources provided through the OppLoans blog.