If you're like most Americans, you probably have one or two credit cards tucked away in your wallet. While using credit wisely can help you to build a solid credit history, irresponsible spending can quickly lead to a financial nightmare. The next time you're tempted to use your plastic, consider the advantages and disadvantages of using credit for purchases.
Convenience
One of the biggest advantages to using credit cards is their convenience. Credit cards are accepted in numerous locations worldwide, and they offer more security than carrying large amounts of cash. You can use a credit card to reserve a hotel room, make airline reservations or secure a rental car. Credit cards are also convenient if you want to shop online or over the phone or pay bills electronically. Credit cards can also be used to cover expenses in emergency situations.
Rewards
Depending on your card issuer, charging purchases can help you earn rewards, including airline miles, hotel stays, cash back or points that can be used to purchase goods and services. Some banks also offer bonus points for paying on time, paying your balance in full or shopping at certain merchants. If you're committed to paying off your balance in full each month to avoid interest charges, using credit cards to earn rewards or bonuses may save you money in the long run.
Consumer Protection
Credit cards also offer consumers increased protection for their purchases. For example, the Fair Credit Billing Act allows you to dispute billing errors to unauthorized purchases, mathematical errors, charges for goods and services you didn't receive or charges for the wrong amount. Many credit card companies also offer protection if something you bought is lost, damaged or stolen or if your account is compromised due to identity theft.
Long-Term Cost
The biggest drawback of using credit to make purchases is the amount of money it can potentially cost in the long term. If you're only making minimum payments on your debts and your credit card company is charging you a high interest rate, you may end up paying two or three times the purchase price. Unless you pay your balance in full each month, you're costing yourself money in the long run when you use credit.
Overspending
While using a credit card can be convenient, it can also tempt you to buy more than you normally would. When you spend cash or use a debit card, you feel the consequences of your spending immediately. When you make purchases with a credit card, you may be tempted to spend more because you don't have to pay until later on. If you continuously overspend, you may end up with debt you can't afford to pay off, which can have a negative impact on your credit rating as well as costing you more in interest and late fees.
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