Credit Cards: Bane or Boon?
Ah, the credit cards. That little piece of plastic is an amazing invention, really. It allows us to buy things we can’t really afford.
And there’s the rub. In reality, credit cards are not evil tools of the rich man trying to keep the rest of us down. But they’re not a godsend, either. Credit cards are, like most things in life, what you make of them. Use them wisely and they can be an important part of your financial life; use them unwisely and you may find yourself at the bottom of an increasingly deeper black hole of debt.
The credit card industry takes in more than $900 billion each year. But as the problem many Americans have with debt has become more publicized, some people are opting to cut up the plastic in favor of cold, hard cash, checks, or debit cards (linked directly to a checking account).
So if credit cards come with 30% interest rates, annual fees, and a host of other charges to drain your pocketbook, why have one at all?
For those who use credit cards wisely, there are some benefits. Read on. . .
The Benefits of Credit Cards
As savvy consumers began avoiding credit cards that offer them no real benefits, credit card companies introduced cards with – you guessed it – benefits. They run the gamut, from cards that offer cash back on purchases and travel rewards to those that rack up discount points for a new Mercedes or Lexus. A new MBNA card, called the BabyMint College Savings Platinum Plus MasterCard puts a percentage of your purchases in a college savings fund for your kids.
Check out the different credit card programs available.
Of course, there are costs, too. Read on. . .
The Costs of Credit Cards
The sad fact is that when something sounds too good to be true, it probably is. And a piece of plastic that allows you to buy anything, whether you can actually afford it or not, sounds too good to be true, doesn’t it? The reality check comes in the fine print of the cardholder services agreement that credit card companies send you about once a year.
That agreement defines terms such as the annual percentage rate of interest you pay on purchases, cash advances, and balance transfers. It outlines your annual fee, if you have one, and any strings attached to your reward plan, if you have one.
As painful as it may sound, read your cardholder agreement. If the credit card company sends you a revised one (and they will), read it too. If you don’t, you may wake up to find that the credit card deal that was so sweet for the first six months is now very, very rotten. Things to watch out for:
- If you have an introductory rate, how long does the rate last?
- What’s the APR after the introductory rate expires (a 3.99% introductory rate might sound very nice, but not so much when it’s quickly followed by a 23.99% APR)?
- If the introductory rate applies to an initial balance transfer, does it also apply to new purchases, balance transfers, and cash advances? If so, for how long?
- Is there an annual fee? A monthly fee?
- Are there balance transfer fees (most credit card companies charge a fee of 3-5% of the balance transfer amount)?
- If your card offers rewards, such as cash back or airline miles, what are the restrictions? Some credit cards only allow you to use your airline miles on a certain airline, or to and from certain destinations, or on certain dates. Some cash back credit cards only allow you to use your “cash back” at certain stores.
- If your card offers rewards, is there a charge for redeeming your rewards? Do you need a certain minimum number of rewards before you can redeem them?
- If your card offers rewards, do your rewards expire after a certain period?
The Bottom Line on Credit Cards
If you’re like most Americans, you already carry some credit card debt. While transferring your debt balance from one credit card to another every time you get a new offer in the mail isn’t a good idea, make sure that the cards you do carry are working for you. To do that, think about what kind of card would best fit your needs. Maybe it’s a rewards card that offers cash back or airline miles. Or maybe it’s a card with a low APR or no annual fee.
If you’re carrying a balance on your credit cards (a balance that you can learn to pay down every month by checking out our debt consolidation or budgeting articles), then credit cards with a low APR may be your best bet. If, on the other hand, you’re a big spender but you pay off your balance month-to-month, then rewards credit cards might serve your purposes the best.
In the end, remember that you can use your credit cards to help you enjoy your money better – by earning you cash back or rewards points – as long as you don’t get sucked into the “Who cares if I can’t afford it, I’ve got plastic” trap.
If you’re already in that trap, there are ways to get out – from transferring your balance to a credit card with a low APR to learning how to rein in your spending ... Then this Money Solution "Debt Consolidation" article may be for you.
