- Emergencies: Credit cards can be useful when you don’t have cash on hand and there is something that needs to be paid for right away, such as an auto repair or an insurance co-payment.
- Reservations: Credit cards can be used to guarantee hotel rooms, rental cars, and other rental items. This is an important use, especially if you travel.
- Convenience: With a credit card, you can buy things over the phone or on the Internet. Credit cards make purchasing things very easy. They also provide you with a record of everything you spend; this is an important bookkeeping benefit. Using a credit card is very convenient.
- Cash flow and timing: If something is on sale, and you know you have the cash coming in a week, you can actually buy the item before you pay for it. In this way, you can take advantage of sales. (But remember, you do not save money by spending.)
- Free services: Often, credit cards offer rewards, such as extended warranties, travel insurance, airplane miles, gasoline rebates, and cash rebates—all of which can reduce the cost of some items.
While there are benefits to using credit cards, there are drawbacks as well. Credit cards must be used wisely to avoid problems. The following is a list of some of the problems associated with using credit cards:
- Increased spending: People don’t spend as much time thinking about how much they’re spending when they use a credit card. Research has shown that, on average, people will spend 30 percent more with a credit card than they will with cash.
- Losing track of spending: It’s easy to lose track of what you spend with your credit card. It requires discipline to track the charges that you make.
- Interest and other costs: Interest charges can range anywhere from 8 percent to 25 percent. In addition to these interest charges, you must take into account compounding periods, the annual fee, and other miscellaneous fees such as cash advance fees and balance transfer fees. Often, the costs of using credit cards are double or triple the cost of using other types of loans.
- Obligations on future income: Most importantly, when you use credit cards, you put obligations on future income—by this, I mean that you are required to use your future income to pay for the items you bought in the past with your credit card. As you take on more debt, you not only obligate future income, but you also limit future flexibility should emergencies arise.