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The Pros and Cons of Credit Cards

Credit cards can either be a good decision or the WORST decision you have ever made in your life. If you were to search “Things to do when you turn 18” credit cards rank highly amongst the top 10 but the dangers and benefits of a credit card are severely overlooked. They can have you wishing you never got a credit card in the first place. 

Most people are expecting to go into debt in order to fund a large purchase such as a car or home at some point in their life. For this reason, a credit card can be beneficial in order to build your credit score. 

On the other hand, if you are already bad with controlling your spending you should stay clear of credit cards as they will drag you into years and years of debt. 

  • What are credit cards?
  • Should I get one?
  • Why you shouldn’t get one

What are credit cards?

A credit card is a card issued from a bank that allows you to make purchases on credit. Credit cards differ from debit cards because you are using borrowed money (money that is not yours) that you are required to repay. 

CREDIT CARDS ARE NOT MONEY.

There are a number of different cards that you are able to apply for but the main ones issued to students are cashback cards and reward cards. These cards will likely have zero annual fees and be a good starting point for the majority of people. 

Cashback cards will pay you back a percentage of what you spend on eligible purchases. This amount is usually around 1%.

Reward cars will give you points on eligible purchases that you can utilize at a later date. 

There may also be options for travel rewards cards and other high percentage cashback cards that come at an annual fee. It is likely that the rewards that you will receive will not be greater than the annual fee given your expenditure at this point in your life although it is definitely something to consider on a case by case basis. A $500 credit limit, $0 annual fee card with definitely get the job done.

It is important to go in knowing what you want because banks are constantly willing to issue more credit to you than you can afford. Credit card fees are a major source of a bank’s income so they are always looking to capitalize on the ill-informed. 

It should become a part of your routine to pay off your credit card every two weeks and not carry a balance over a month. Doing this will make sure you do not incur any interest charges on the money you owe. 

Should I get one?

Unless you have a significant amount of wealth you will be applying for a mortgage or car loan at some point in your life. Developing a good credit score is essential for reducing the amount of interest you have to pay on the money you borrow and save you thousands of dollars. A credit card is a great way of building your credit score. I will be using the TransUnion credit score in my discussion. 

Your credit can range anywhere from 300 to 850.

Your credit score is broken down into a few categories: Utilization, payment history, balances, depth of credit, new credit, and available credit. We can go more in-depth on these in a later blog. 

Your credit card should replace your debit card for small everyday purchases in order to capitalize on the benefits of the card. As long as you can pay off your card and not carry a balance you can build your credit score and avoid fees. The benefits are pretty good as you increase your chance of qualifying for lower percentage loans and saving you tons of money in the future. 

But, there are two sides to every story. 

Why you shouldn’t get one

If you already have trouble spending money a credit card can ruin your credit score and put you into virtually irreversible debt. The credit that becomes available for you from credit cards will act as a catalyst for your financial actions. If you were already good with money you’ll be fine, if you are bad with money you’ll only be worse off. 

If you carry a balance on your credit card you will be paying around 20% extra on the money you owe. If you carry $100 to the next month you now owe $120. I think you can see how bad this can get on a larger scale. Along the way, you will also be ruining your credit score and borrowing money will cost you more in the future. 

If you don’t have the money in your debit account do not spend the money on your credit card. You won’t be able to pay it off and you will hate yourself in the future. A rule of thumb is if you cant buy 10 of them you can’t afford to buy one of them. 

People also justify their purchases all the time by saying I get 1% back on my card. Do not get stuck in the trap of spending to get money back. If you don’t buy a $100 item you didn’t lose out on 1% you saved 100%. As humans we are very good at convincing ourselves that we need to purchase something, avoid this urge as much as possible. I would recommend reading my previous blogs on saving and budgeting for more about allocating your money and using your money wisely. 

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