by Vanessa Diem
Dangers of Credit Cards - Here are some quick facts. The average American adult owns at least three credit cards. 48% of people surveyed prefer using credit cards over other forms of online payments. If so many people are using them, they cannot be that bad, right?. Well, here is another quick fact for you. The average credit card debt per person is $6,354. Therefore, while many might love credit cards, there are dangers of using credit cards.
Remember the first time you saw credit cards in action? With just a single swipe, adults could walk away with so much merchandise, and they did not have to pay! It must have seemed like magic. However, just as the apprentice in The Magician’s Apprentice discovered, magic isn’t much fun if it cannot be controlled.
As alluring as owning a credit card is, it comes with real dangers. They might be one of the most useful financial tools ever created, but they come with a number of traps and pitfalls the unwary and inexperienced might fall victim to.
Hence, if you are thinking of getting a credit card, or you are already a proud owner of one, you need to know these dangers and know how to avoid them.
In this article, we will consider these dangers and how to avoid them. But first, let’s look at why people love credit cards.
Despite the dangers of this financial tool, people simply cannot stop using credit cards. Here are some reasons why.
Credit cards are so convenient. Instead of carrying around wads of cash, credit cards make it easier to carry a lot of money around. Most stores do not even accept cash, instead preferring credit cards. Furthermore, online transactions often depend mainly on using credit cards.
Credit cards are relatively safe. Aside from preventing an abnormal bulge in your pocket, you can carry a large amount of money around without people noticing. Even if it is stolen, you will lose little. Promptly reporting the theft will save you from trouble. If someone steals your purse containing $5,000 cash, you are in trouble. But if on the other hand, they steal your wallet containing your credit card, promptly reporting will reduce your loss.
Since credit cards can be used for online transactions, it makes them really versatile. For example, if you travel out of your country and need to pay for something, using a credit card means you do not have to change your currency.
Using credit cards in a responsible manner boosts your credit score. Credit score is very important. It is required when applying for loans and insurance, applying for a job or looking for a place to rent.
Many credit card providers give rewards for using or getting a credit card. These rewards can be flights, hotel accommodations and even the opportunity to earn some cash back.
Credit cards are a source of emergency funds. No matter how much we plan, life is full of surprises, some of which are unpleasant.
Hence, when such situations occur, and you need more money than you currently have, credit cards can come to the rescue. They are loans that you carry around in your wallet.
The above are just some of the reasons why people love credit cards.
Now, let us consider some of the dangers of using these cards.
According to a study found in Marketing Letters,people who pay for stuff via credit card are willing to pay twice as much as those who choose to pay for things by cash.
Several factors contribute to this. For one, people tend to control the way they act when they have physical things to guide them. Due to the non-physical nature of purchasing via credit card, it is harder to keep track of the prices of things you pay for and recognize how this affects your budget.
By buying via credit card, you do not feel the lightness of your wallet as opposed to when you pay in cash. Here’s an example. Imagine you had $40 cash in your wallet. Walking down the aisle, you find something worth $20. Now, you would think hard about making a purchase because it would mean parting with half of the money you have. Now imagine you had a credit card. Your credit card limit is say $2000. $20 is simply 1% of your limit. You find it easier to make a purchase now, right?
Credit cards are sometimes too convenient and cause people to spend more than they ought to. For example, if you found a nice TV but you do not have money in the bank to purchase it, it is easy to borrow some money and buy the item immediately. People forget that just because they can buy stuff through their credit card, it does not mean they can afford to buy.
Solution: To avoid this danger, handle your credit card as you would cash. Remember the example of the $20 purchase on a $2000 limit. You do not actually have $2000. It is simply an illusion.
Therefore, set a limit on how much you can spend using your credit card. It is even better if this limit is lower than your actual credit card limit. Live within your means!
Credit cards come with interest rates. Failure to pay off your balance at the end of a set time attracts increased interest rates. If your credit card limit is $1000, you should not spend all of that in a single month, except if you are entirely sure you will pay back the entire sum before the end of the month
Credit cards also come with minimum payment plans. Many people are content with paying the minimum, rather than focusing on bringing their balance to zero.
Interest rates can lead to financial ruin. Sometimes, these rates end up costing you more than double the limit on your card. The longer it takes to pay off your debt, the more indebted you become.
If you fail to make payments on time, aside from the increased interest rate, you will also have to pay a late payment fee. Serious defaulters can be reported to authorities.
Solution: When applying for a credit card, try to get one that requires no annual fees. Furthermore, ensure to pay off your credit card balance even before the allotted period. Doing this ensures that you do not have to pay extra. Strictly avoid a late payment or no payment at all.
The goal is to bring your card balance to zero. Late payments or no payments make this impossible to achieve and will invariably bury you in more debt. To avoid late payment, you can set up automatic payments. You could also set reminders for when your payment is almost due so you can pay ahead of time.
The best treatment is to pay in full and on time every month.
When you own and use a credit card often, most of the money you make is geared towards repaying your loan. Thus, it makes it very hard to save. You might think you are saving money, but if you are indebted to credit card companies, all your savings might be wiped out.
Solution: Be smart. Swipe wisely.
Good credit life is a healthy financial life. Your credit card use can affect your ability to enjoy certain benefits. If you use credit cards responsibly, it has positive effects on your credit rating.
If you are a defaulter, your credit score will suffer. Credit scores are an indicator of your financial health. Banks, employers and so on check credit scores. If your credit score is low, it is a warning to those that can check your credit report. If the ratio of your balance and credit card limit is bad, it can reduce the range of beneficial financial products you can enjoy.
Solution: Once again, be smart with your credit card use. Late payment, even by 1 day, will negatively affect your credit rating. Hence, make payments in full and on time.
With credit card misuse, it is easy to get into debt. Debt can lead to severe complications in your life. It affects your health, your relationships, your job and many other aspects of your life. When indebted, savings are one of the first things to go out the window.
The plans you have made for your future; marriage, education, having children and others cannot be achieved.
There are also "Charged-off accounts." These accounts are unpaid credit card accounts. A charged-off account will affect your financial health and will be a problem. Some credit card companies even sell these accounts to collection agencies. These hound you for years and are a source of distress.
Solution: Spend wisely and within your means. If you notice that every month, it gets harder to make payments on your credit card, stop using it. Rearrange your finances and recover.
In 2009, the Credit Card Act ensured that credit card companies made it easier to understand the terms and conditions of using their cards. However, there persists confusion with these cards.
Many folks have fallen victim to the tricks of credit card companies. Credit card companies have the right to change the terms of the agreement without the consent of the card owner.
Before getting a card, ensure that you understand the terms and conditions. Some cards come with no introductory rates, which is great. However, this has a grace period, after which you are required to pay a certain rate. It might be cleverly hidden, but it is usually contained in the fine print.
Credit card companies are looking to make money from your debt. The sooner you understand this, the more intensely you’d read their fine print. They are not giving you free money. Some entice people with rewards. Read the fine print to understand the terms of these rewards. Understand how to redeem them.
Solution: Read the fine print! Don’t be carried away by what credit card companies are showing you. Read between the lines and understand their terms and conditions.
Every credit card user is a potential victim of theft. Each year, the Federal Trade Commission reports a high number of cases involving credit card fraud.
Due to their size, credit cards can be easily misplaced or stolen. Furthermore, identity thieves and fraudsters can steal your credit card information from different sources; for example, a store you used your card. When this occurs, damage can be done to your financial standing.
Solution: Keep your cards in a safe place. Do not give out credit card information indiscriminately. When making purchases or transactions online, ensure you are purchasing from a secure website.
If you see suspicious charges, or if you lose your credit card, report these immediately to mitigate any losses that might be incurred.
Credit cards are a great tool to have. From convenience to safety and rewards, credit cards can be quite invaluable. However, just like every tool and technology, it should be used responsibly. Failure to use this technology responsibly can be dangerous and have negative consequences. It can lead to strained relationships, increased stress levels, and unhappiness.
This article has highlighted some of these dangers and the steps that can be taken to avoid them.
By following the advice given above, you can be sure to reduce the impact of these pitfalls. Swipe wisely.
About Vanessa Diem
Vanessa Diem is a finance blogger who has gained widespread recognition for her insightful and informative content on personal finance, investing, and money management. With a keen understanding of the complexities of the financial world, Vanessa is dedicated to providing her readers with practical advice and strategies to enhance their financial well-being.