Pros and Cons of Credit Cards
Actually, there are few pros to having credit cards. Created as a convenience, they have, in fact, become a nightmare. Even if you open an account with the intent of paying the balance in full each month, it's incredibly easy to rack up balances so high that it will take years to pay them down. Pretty much everyone is guilty of adding to, rather than diminishing, credit card balances.
Credit Card Pros
Other than convenience, and perhaps minimal protection, the biggest pro to having credit cards is that successful management of three bank cards and two department store accounts can, indeed, bolster your credit rating.
However, lenders blanch when they see excessive credit cards, maximization of credit limits, slow payments, late payments, chronic delinquencies, or other worrisome debt repayment habits.
Americans both love and abuse their credit cards. Reportedly, the amount of outstanding personal credit card debt more than tripled between 1990 and 2002, from $173 billion to a whopping $661 billion.
Credit Card Cons
The cons frequently far outweigh the pros. Credit card issuers are constantly seeking customers who charge beyond their means and make minimum payments carrying 18 to 30 percent interest for long periods of time. Often the interest charges will double, or even triple, the amount originally charged, making you poor and the credit card company rich. Also, credit cards now charge $25 to $30 in late charges, or for going over your credit limit, and both offenses may boost your interest rate. (The average late fee for credit cards was $27.46 in mid-2005.)
Every month that you make a partial payment on your credit account, you are charged exorbitant interest, and the disposable or durable item you purchased not only continues to lose value, the amount you paid for it continues to increase. Clothing, for example, usually drops 50 percent in value the minute you wear it. This loss in value doesn't even take into account what that debt could potentially do to your credit rating.
If you charged $3,000 on your credit card and made minimum payments of $148.50 over the next two years, you would pay an extra $559, adding 18.6 percent to the total cost. With one late fee, your interest and fees could leap to 28 percent, raising your required monthly minimum to $159, and increasing the extra costs to $691, adding 23 percent to the total cost.
When you apply for a loan or seek a new credit card, potential lenders will acquire your credit report and review your debt-to-income ratio. If you have used well beyond 30 percent of the available credit on your credit cards, they may charge you high interest rates, decline your loan, or refuse additional credit.
Even when you have racked up large balances, credit card companies continue to barrage you with offers, and they all sound tempting, particularly when they offer a low-interest introductory rate. However, be aware that all credit card companies source your credit rating or FICO score to determine your credit worthiness, and all inquiries are registered and may penalize you in the long run. Also, those fabulous offers almost always come with caveats:
The rate can triple within months.
They will raise your rates if you miss one payment.
They keep raising your credit limit and urging you to spend more money.
You have to read the small print — word for word. And you'll have to monitor all of your statements to watch for hidden charges or elevations in your interest rate. Despite 10 years of outstanding credit and always paying her bills on time, one month a friend didn't mail the payment in time to reach the company on the due date, and they raised her interest rate to 30 percent — and she didn't even notice for a year!