Credit Card - Pros & Cons
Credit Cards offer some limited benefits and conveniences over Debit Cards. The problem with Credit Cards however is that they break one of the golden rules of money - Only Borrow to Invest. There is no escaping the turth that every time you use a credit card, you are borrowing money. It is not 'Free Money', it is actually VERY EXPENSIVE money.
It makes very little sense to borrow money to purchase something, when you have the money in your bank account. If you don't have the money - you should not be buying. - It is a simple finacial truth. With proper financial planning you should never be in the position where you need to rely on a Credit Card to finance some emergency expenditure. However - we do not live in a perfect world and there are some times and circumstances where Credit cards do offer some benefits.
Credit Card Benefits
Credit Cards & Debit Cards fall under different legislation and the Credit Card protections in law are much stronger than those offerred to Debit Card Holders. Although not enshrined in law - most debit card providers do offer a "Zero Liability" undertaking, but it is at the discretion of the bank.
In Law - Liability on Credit Cards is limited to $50 per card, period. With Debit Cards your legal protections are based on how quickly you notice a theft from your card. Liability is capped at $50 within 2 days, $500 within 60 days and unlimited after that. You are deemed 'notified' of the theft as soon as you receive or access a statement or inform the bank of the theft.
Whilst the legal protections ARE stronger for Credit Cards, the "Zero Liability" protections offerred on debit cards should provide adequate protection.
Credit Card Rewards
Credit Cards tend to be associated with the best rewards programs - If you are going to have a credit card, you might as well get one with the kind of rewards that will benefit you most.
Credit Cards can be useful for re-building credit or initially establishing a credit history. Purchase of a car or a home also build your credit.
Zero Percent Financing
As an inducement to take out a credit card, many companies offer zero rate transfers. This is where you can transfer a balance to the new card and pay zero percent interest for a fixed period. For the financially diciplined this may offer some opportunities to gain some 'breathing space' whilst paying down debt. However beware - such cards usually carry high interest on any additional purchases. See Credit Card Traps
It is an unfortunate side-effect of how merchants process debit cards that when they place a lock on funds for a transaction, your money remains locked until the merchant chooses to unlock it. This can effectively stop you spending your own money. NOT GOOD.
Credit Card Gotcha's
Encourages Debt Spending
Whenever you borrow to fund something that will not bring growth, that does not in some way offer a return or personal advancement, you are financially diminished. Credit Cards encourage impulse consumptive debt expenditure - this flies in the face of good financial management.
High Credit Card Interest Rates
Credit cards are the most expensive form of credit there is, it makes no sense to borrow money at these rates when if you must borrow, you could do so at half the rate simply by approaching your bank.
High Credit Card Charges
Credit Card charges are increasing and they are continually inventing new ways to charge.
Credit Card Penalty Interest Rates
If you fail to make a payment on your card... or any other card for that matter, the credit card company can start charging you 'Penalty Interest Rates', these can be as high as 40%. Ouch! You know you are being ripped.
Credit Card Terms Can Change
I find this hard to swallow. In very few areas of business can you find such a one-sided arrangement, where one party can simply change the terms & conditons of the contract with only 15 days notice. They can even up that great 'fixed rate' bargain you thought you had. If you cannot pay-off the debt, you are stuck with the new terms. NOT GOOD.
Designed to Cost YOU
There was a time when you could purchase with your credit card and then simply pay it off at the end of each month and there would be no charge. Since then however the industry has been making it harder to do this. Introducing things like Annual Fees, Two-Cycle Billing and shortened grace periods. Be under no illusions, credit card companies only make money when you get into debt or have to pay charges. They do everything in their power to make it happen.
Credit Card Debt Damages Credit Rating
If you get into trouble with your credit card and it is easy to do, your credit rating can be severely damaged.
Credit Card Rip-Offs
The Credit Card industry has developed a bit of a bad reputation with some of the tricks and traps it has used against the financially vulnerable to ensnare them into debt. See Credit Card Tricks & Traps
On balance the benefits provided by Credit Cards are FAR outweighed by the potential costs and financial complexity of owning a credit Card. We recommend that you give up using credit cards for everyday use. Our recommendations are:
There is little doubt that from a financial point of view, credit cards are a poor financial instrument, however they do provide a few benefits and if used with discipline can be advantageous. If you must have a credit card - choose one good one (See - Choosing a Credit Card ) and only use it for emergencies and for necessary purchases where a debit card cannot be used. Always pay off the Credit Card Debt in full as soon as you get the statement.
- Use a pre-payment Credit Card for online purchases and emergencies (See Pre-Paid Credit Cards )
- Use a debit card for other purchases
- If you must, hold one Credit Card for emergency use only (See - Choosing a Credit Card )