by Dave Kutcher
It seems so easy, doesn’t it? You walk into the store to buy something, step to the register and pull that credit card out without even thinking twice. While using a credit card to make your purchases can be convenient, doing so comes with a required responsibility of properly managing your debt.
Debt, and in particular credit card debt, isn’t necessarily always a bad thing, in fact there are some positives to utilizing credit cards…but doing so without serious consideration of how and when the charges can be paid back may quickly get you into trouble.
Let’s look at some of the Pros and Cons of using credit cards.
PROS
Building your Credit rating:
Establishing and maintaining a good credit record will yield many positives for you in your financial life. A strong credit rating means you will have access to lower interest rate charges when financing purchases. This includes your home mortgage, auto loans, ATV loans, etc. Any time you can limit your borrowing costs that is a good thing. It may not seem like much, but even a 1% difference in loan rate on a long-term loan, such as you mortgage, will save you tens of thousands of dollars in interest costs over the life of that loan.
So, it is very important to build a strong credit history early on in your financial life. If you have never used a credit card before, the very best way to do this is to get yourself a credit card and under strict adherence to never charging anything you can’t pay cash for now, use the credit card to pay for the item(s) and when the bill comes in, pay the entire balance off in full, without carrying any balance forward.
You should continue to do this month after month, again, carefully making sure you will have the money to pay the bill on time and in full. In doing so you will establish a pattern of using debt responsibly and you will be doing so without incurring any fees or charges because your bill will be paid on time and in full every month. A simple way to start this might be to limit yourself to using the card for gasoline purchases that you would otherwise pay for in cash as needed.
Rewards:
There are many, many promotional programs available for credit card users. Low introductory interest rates, travel credits that can be used for airline flights, hotels, and car rentals as an example, cash back rewards and more. No credit card company is giving away things for free. When you are receiving promotional rewards, you need to remember that the credit card companies are not feeling nice and granting you some special deal, they have priced the cost of the rewards into their overall costs and something else is being sacrificed so that you can receive those rewards.
Most likely, it is a higher interest rate card than you would otherwise be eligible for if it didn’t include rewards. If you have to choose a reward program stick to the cash back rewards unless you have a compelling reason for opting into a different type of reward plan.
It is important to point out here that if you are paying your balances in full every month, which means you are NOT incurring interest charges, a particular set of rewards might be quite attractive to you, such as travel rewards. And since you aren’t paying interest by paying your balance in full, you can get access to the rewards without sacrificing and paying a higher interest rate than would have been available to you otherwise.
Fraud Protection
Credit cards do provide a stronger layer of fraud protection than your bank debit card should your card be stolen and incur fraudulent charges. This protection comes with some rules and regulations, however, so be sure you read the fine print. In general, you will have responsibility to report the fraudulent transactions within a specific period to receive the best protection. Don’t sit on issues when you see them. Call the credit card company immediately. And be prepared that they will shut that credit card off so that it can’t continue to be used fraudulently. It is typical for that same company to issue you a new card so you can get back to proper use of your card. But, you will have a period of time where you don’t have a card…so, plan ahead.
Not carrying cash
Paying with a card might be safer than carrying cash around and if your card is stolen it can be replaced. If your cash is stolen, you are likely out of luck. Again, though, keep in mind all the nuances of being a buyer…you may have been able to save purchase price on an item by paying cash. Retailers do this because by paying cash, you have saved the retailer the cost of the card usage that they pay as a vendor.
CONS
Potential for Overspending
When using a credit card it is easy to get the sense that you have unlimited resources at your fingertips and it can be tempting to make purchases that you would otherwise opt out of if you had to pay cash. Resist the urge!! If you keep your purchases to limits that you can pay off in full at the next billing statement, you will keep yourself out of trouble.
Falling into DEBT
Making purchases that you cannot pay off in full, requiring you to carry a balance forward, incurring finance charges, can get you in trouble every quickly. The credit card company is NOT your friend. They will encourage you to carry a balance by requiring small minimum payments each month. It can be very tempting to pay those minimum payment requirements, but you need to remember, in doing so, you are paying much more for the item you purchased because you now must add the cost of the interest charges on that item in the months and years ahead. The credit card company wants you to keep muddling along each month paying the minimum payment while they add exorbitant interest charges to your bill.
Stick to a plan that is manageable for your budget and resist thinking you can afford something bigger and better just because you have a credit card to pay for it at time of purchase. Lots of things can happen…what if you make some big charges and then lose your job, unable to keep up with the forthcoming credit card payments. If this happens you will be late on your payments, incur unnecessary interest charges and potentially ruin your credit rating due to poor financial management.
If things get out of hand and you are struggling to make your payments, put the card away and DO NOT keep using it. Force yourself to rein spending in over the short term and do all that you can to pay down your balances.
Poor Credit
Mismanaging your credit card will not be kind to you. Negative reporting on your credit rating is costly and potentially serious enough that you will have zero access to credit at all.
Most every card you may have now or might access in the future, will have an option to make payments automatically from your bank account. It is strongly suggested that you set up online account access and, in your profile, establish an automatic payment each month to the card prior to or on the due date. If you are concerned with over drafting your bank account, we suggest you set up auto pay for the minimum amount due each month. You can always go online and pay the balance in full, but if you have autopay set up at least it will keep your card current in terms of your payment responsibility and you will avoid negative payment history on your credit report.
In summary, like most things in life, credit cards have pros and cons. Everything in moderation is always a good rule. If you manage your cards wisely, that card be a valuable financial tool. If you allow things to get out of hand or mismanage your payments, you will be doing yourself more harm than any good that could have come from the credit card.
My name is David A. Kutcher, a retired Marine Corp Captain. My business partner in the lower 48 is Richard C. Scott, CLU, LUTCF. For nearly 40 years we have been helping folks with their personal retirement decisions. We encourage you to make an appointment and get ahead of your concerns as early as is possible. You can catch us on the radio every Saturday morning, “Retirement in the Last Frontier”, 8:30-9:30 on AM 650, Keni Radio. Frontier Retirement, 10928 Eagle River Road; Eagle River, AK 99577, (907) 795-7452.
