So many people own a credit card anymore its almost a right of passage. I even received a "congratulations on your eighteenth birthday" card from one of the companies. As a college student I quickly learned the meaning of debt and "maxed out". I figured its time to take a close look at what credit cards really do.
First, let's look at the advantages that a credit card offers (don't worry, this won't take long):
1. Convenience: You can make a purchase without having the cash with you (or without having the cash period). They are also easier to use than checks, and it is almost impossible to rent a car without one.
2. Safety: They are safer than cash. If you lose your credit card, you may only be responsible for the first $ 50 that someone who finds it (or steals it) may put on your card, if they even try to use it at all. Cash on the other hand cannot be replaced.
3. Establish a credit history: Credit cards are an easy way to establish your credit history.
4. Cost: Banks make a lot of money off of you (Sorry, I guess that's not really an advantage for you!).
Now, let's look at the disadvantages of a credit card:
1. Convenience: You can make a purchase without having the cash. I know this may sound crazy, but remember, if you have an existing balance, then you lose your grace period (on most cards), which means you will be paying interest from the day you make your purchase (s). Even if you don't have an existing balance, there is always the temptation to not pay the card off entirely, leading to interest rate charges. It 'also true that consumers spend as much as 50% more money at the store when they use a credit card. It's much easier to spend plastic than cash.
2. Interest rates and fees: Credit cards charge interest rates as high as 21% (again higher) and they average around 18%. If you already have a balance on your credit card and you only pay the minimum, it may take several years before you even begin to touch the principle of any new purchases. At 18% interest, paying the minimum only, the cost of your original purchase will nearly double after four years. Throw in a late charge or two and you can see the costs just keep rising.
3. Low monthly payments: A card with a balance of $ 3,000 and an 18% interest rate will take more than 30 years to pay off entirely if you only make the minimum payments. For the record, you will have paid more than $ 7,000 in interest alone (bringing your total to more than $ 10,000). Also, let us not forget about the wonderful "Payment Holidays" the card companies give you about once per year. These "holidays" allow you to pay interest on your interest, extending the length of your loan and adding to the total amount of interest you pay. Paying $ 10,000 over 30 years for a $ 3,000 couch that lasts about 5-10 years just doesn't seem worth it.
I have often heard the saying "Banks make a lot of money off of us, that's why they have bigger buildings than we do." What you can see here is that all of the reasons for using a credit card are actually reasons to not use a credit card. Of course there are still those who will argue that you must own a credit card for real emergencies or to rent a car. The problem is, we can always find one or two reasons to justify having a card, then we use the card for everything but those reasons. You say that you are different, you will only use your card for a select few legitimate reasons? Well, I challenge you to do just that.