Not always. But they can be.
Some people think credit cards are evil and no one should ever think of using one. And some think credit cards are like magic and they get in financial trouble because of it. Regardless of which side you land on, let’s take a closer look at how credit cards can be both good and bad.
First of all, what actually is a credit card? A credit card is a loan to you from a bank, one in which you have a maximum amount you can spend (known as the “credit limit”). With this loan, you can swipe the card for purchasing pretty much whatever you want as long as you stay below the credit limit. Credit cards are called “revolving” loans, because the balance should go up and down over time. If you carry a balance from month to month, you’ll pay interest on that balance. But if you pay the balance off before the end of each month, you won’t pay any interest. Most cards also carry a “cash advance” feature that lets you get cash from an ATM. Cash advanced to you gets added to your balance.
Credit cards can be really good.
- They help you to build a credit history and maintain a good credit score when you use them responsibly. Responsible use is when you pay off the entire credit card balance every month (or throughout the month). This boosts your credit score because you’re proving you’re capable of using self-control and keeping the balance below the limit and paid off each month.
- Most credit cards offer some type of reward, whether it’s points, miles, discounts when you buy stuff, etc. This is free money so take advantage of it!! Don’t stress about squeezing out every possible point or dollar, just pick one that sounds good and roll with it.
- Very importantly, keeping your spending solely on a credit card instead of a debit card is extremely helpful if your account is hacked. If you spend only on a credit card and that account is stolen, the bank will freeze the card but you won’t be out any actual money. If you use a debit card linked to your bank account and the debit card is stolen, that money is gone and it’s rare that you’d get it back. This is a compelling reason to spend only on a credit card and use your bank account to pay off the credit card balance.
Credit cards can be bad when used irresponsibly.
- Some people just do not have the self-control to use a credit card responsibly. They go nuts and spend, spend, spend until the credit balance is out of control and they don’t have the money to pay it off. This is bad for your credit score and creates a guilt-ridden relationship with money – NOT what we’re aiming for here.
- The interest rates on credit cards are typically super high, over 20%. As mentioned above, if you carry a balance from month to month, you’ll be charged interest on that balance. If you carry a $1,000 balance and the credit card has a 20% interest rate, it will cost you $200 every month on that $1,000 balance until you pay it off. And don’t even think about getting a cash advance from the card, the interest on it is usually up to 30%! Yikes.
- Credit cards also often carry steep fees beyond interest. Fees for late payments, cash advances, and over-limit balances are very common. You might also run into cards that charge an annual fee from year to year.
So credit cards can be a key component of your finances when used responsibly. But don’t fall into the trap of overspending and getting in credit card debt way over your head!
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