Modern society runs on credit. People use credit cards to pay bills, pay for vacations they couldn’t otherwise afford, and make investments into their own and their kids’ futures. It’s easy to get addicted to using credit, which can cause problems if you’re not careful, but credit is not an entirely bad thing.
The Advantages of Using Credit
Credit is convenient and easy to use, but that’s not its only advantage. There are several benefits to using your credit card often, as long as you pay the balance off in full every month.
Rewards and Perks: Many credit cards offer cash back, frequent flier miles or other rewards for regular use. This can save you money in the long run. Some cards offer intro bonuses that can go up to $400 in extra cash back, which is a great perk. Other cards offer a 0% intro APR that can help you pay down balances. If you can get a card with multiple perks, you can end up reaping some serious rewards. Here’s a good list of the cards that have the best rewards.
Raise Your Credit Score: Using credit regularly and paying it back at the end of the month can boost your credit score, making it easier to qualify for a home or auto loan or rent an apartment.
Emergency Funds: Credit use can help you ensure all your bills are paid on time and that emergencies are covered. If you have a bill due Tuesday and aren’t getting paid until Friday, putting it on your credit card saves you late fees or the danger of transferring money from savings, where you will not return it.
The Downside of Credit Use
When credit use becomes credit abuse, it can cause you serious financial problems. If you charge more than you can afford to pay back or don’t pay your credit card bills on time every month, you can get yourself into trouble.
Interest rates: Credit cards often charge high interest rates on carryover balances. You could end up paying 20% or more in interest on any amounts you don’t pay in full. If it takes you several months to pay back a purchase, you could end up paying twice as much as you would have if you’d paid in cash.
High balances affect your credit: If you carry too high a balance on your credit cards, it can negatively affect your credit score. A high debt-to-income ratio indicates that you cannot handle any more credit, which could cause you to be denied for major loans. You should never charge more than 30% of your credit limit in order to avoid this problem.
Fees: If you don’t pay your credit card bills at all, you could be charged high late fees, be sent to collections, and/or have your account closed. These negative financial events significantly lower your credit score and impact your ability to get a home or auto loan, or even rent an apartment.
No emergency funds: Maxing out your credit cards means that you won’t have credit available in an emergency, which could be problematic if you are between paychecks when a crisis happens.
It’s important to use credit responsibly to avoid the consequences of credit card use. However, you should have some credit available in order to boost your credit score — if you close all your credit cards, it could hurt you in the long run.