What Are the Costs and Pitfalls of Using Credit Cards?

Credit cards can be a useful tool in establishing credit scores used in making substantial loans and lowering interest rates. However, there are many implications that come with using credit cards. The major benefits of credit cards soon become drawbacks if the cards are used improperly. Credit cards may increase financial power, but it is more important to know how to control this power.

Zero Percent APR

Many credit card companies offer a zero percent Annual Percentage Rate (APR) rate to entice new customers. The APR is the interest normally paid on a credit card; a zero percent APR effectively means that the customer can freely borrow money. However, this is a pitfall because these rates are typically introductory. After the introductory period is over, the interest is usually raised to a significant rate. This is particularly important for balance transfers -- transferring one credit card balance to another card; if the customer is unable to pay off the entire balance before the introductory period ends, he may end up paying more interest than for his previous credit card.

Cash Back

Credit card companies award customers a certain percentage of their purchases as cash back every time the credit card is used. For example, a $100 purchase on a 1 percent cash back would make the total charge $99. Some credit cards may even offer more significant percentages on purchases made with partner companies, such as airline or home furnishing companies. Credit card companies use cash back offers to promote spending and create consumer debt, effectively increasing profits from interest rates. Moreover, increased cash back rates may encourage spending for items that the consumer wouldn't have purchased normally.

Cash Advances

Cash advances are transactions that take out money from a credit line for cash. These are not normal credit card transactions; interest immediately begins to accrue as soon as the cash is taken out. According to Brigham Young University's Marriott School, the interest rate for cash advances is typically higher than credit card purchases. Additionally, there typically is a cash advance fee of 2 to 4 percent of the original cash amount; some credit card companies may require paying off the initial balance prior to the cash advance fee to gain more interest on the transaction.

Payments

Missing payments is a primary profit engine for credit card companies. Banks justify significant interest rate increases, additional fees and higher minimum payments on missed payments. This could also lead to difficulties in getting loans and future credit line increases. Credit card companies usually do not give notices for due payments and may change dates and policies at their discretion, so it is in the consumer's best interest to monitor the monthly charges on her account.