With the semester starting to come to a close and the holiday season right around the corner you may be seeing an increase in credit card advertising. These advertisements may be coming to you almost every week by mail, or maybe you’ve seen one or two different Samuel L Jackson commercials telling you to sign up for his credit card. There are a lot of great long term and short term benefits from using credit, but it’s important to realize the negative costs from using credit as well. Before using credit, make sure these advantages outweigh the disadvantages.
Advantages of Credit
Purchase Power and Ease of Purchase: Credit cards are great to have because you don’t have to carry around as much cash. This can reduce the ease of theft. In addition, some credit card companies offer insurance on large purchases.
Building a Credit Line– Building credit is not only important when applying for more credit cards, it also impacts the ease of obtaining loans, rental applications, and even some jobs. Having a credit card and using it wisely (making payments on time) will help you build a good credit history.
Emergencies- While you should avoid spending outside your budget sometimes emergencies (such as your car breaking down or flood or fire) happen. Having a credit card allows you to make large purchases you may not have the immediate funds for.
Disadvantages of Credit
Blowing your Budget– Credit card companies encourage users to spend money they don’t have. Majority of credit cards don’t make you pay off your entire balance each month, so if you only have $200 credit card companies may let you spend $500. While it seems great at the time and may seem like free money, that remaining balance of $300 accrues high interest.
High Interest Rates and Increased Debt- This is how credit card companies make their money and this is how most people in the United States get into debt (and even bankruptcy.) “Most credit cards charge you up to 10 times that amount of interest on balances. This means that if you have $100 balance that you don’t pay off, you will be charged 20-25% interest on that $100. This means that you owe almost $30 interest (plus the original $100) at the end of the year. “(Mountain State: Center for Independent Living)
Brett Zapletal – Peer Counselor II
Powercat Financial Counseling