A credit card is a popular payment method accepted by most retailers world-wide. Transactions are free to the consumer and incentives for credit card use are provided in the form of travel or cash-back rewards and insurance protections. For many people, credit cards provide a feeling of empowerment because a credit card can provide you with a sense of control in your life, giving you the ability to purchase things you want without having to delay gratification. Some of the key benefits and risks of using a credit card are outlined here.
Owning a credit card is a significant responsibility, however, and the risk of getting into debt is a concern that should not be taken lightly.
CONVENIENCE - IS IT BECOMING TOO EASY TO SPEND?
A credit card is a convenient payment method with practical uses for online purchases and large in-store payments. This form of payment can cover both expected and unexpected purchases, including emergency costs. It is this convenience of not having to carry cash and paying later that has made credit cards so popular.
When spending is easy to do, is a credit card perhaps too convenient? Nearly all consumers engage in impulse purchases at times, with some people having more control over their spending than others.
MODERN PERKS AND THEIR HIDDEN COSTS
Perks, such as Air Miles, Aeroplan Miles, retail points and rewards and “cash back” often attract consumers to credit cards. It is worth assessing each year whether the fees you pay offset the rewards you receive. Typical credit card fees can include annual fees, late fees, over-the-limit fees, credit limit increase fees, and finance charges. If you end up buying something that you cannot pay for when the credit card bill is due, then your purchase continues to cost you with interest until it is paid in full.
USE AS A FINANCIAL MANAGEMENT TOOL
Another use of a credit card is as a tool for daily activity monitoring, to organize your finances. Alerts and notifications may be available if you exceed a budget target or your credit limit approaches. Additionally, a free feature is available on some credit cards to provide authorized users with a spending limit.
Although credit cards have value as a monthly budgeting tool, this value is somewhat limited because not all of your monthly purchases can be made on a credit card. It often cannot be used to pay rent, most utilities, post-secondary tuition fees, taxes, a home down payment or any loan payment. Further, some small merchants do not accept credit card payments and large businesses (e.g., automobile manufacturers) often limit the amount they will accept by credit card because of high processing fees.
ACCESS TO FUNDS
A credit card can be a source of emergency funds. A cash advance on your credit card may be your only access to get cash when you need it quickly. Using your credit card for a quick cash advance, however, will result in high interest costs as of transaction date. If you are already experiencing debt, adding a cash advance can make it much more difficult to get back on track. Consider speaking to a trustee about available credit counselling options if you live in Ottawa, Kingston or surrounding areas of Eastern Ontario.
INCREASED SECURITY
Using a credit card instead of paying by cash or cheque is generally a safer means of payment, especially when it comes to large and frequent transactions. Cash can be easily lost or stolen, while credit card transactions are closely monitored for fraudulent activity by both credit card companies and banks. If a transaction is disputed, the credit card company will act as an intermediary between you and the other party. Monthly statements reporting the transactions are legally required to be sent to you.
Although credit cards are generally a safe method of payment, it is worth keeping in mind that modern debit cards are also quite safe because they have the same microchip technology. Many people also choose to carry a small amount of cash as an alternative to other payment methods to ensure that they don’t overspend.
YOUR CREDIT RATING
Building a good credit history is an excellent way to improve your ability to obtain a loan with better features, including a more attractive interest rate. If you use your credit card frequently and pay the balance in full each month, your default risk can be lowered and your credit score can become high.
Unfortunately, when you use a credit card, it is easy to lose track of your spending and due dates. If you begin to outspend your earnings because of your credit card, your credit rating will be damaged and my take many years to rebuild again.
SPEAK TO A LICENSED INSOLVENCY TRUSTEE IN OTTAWA & EASTERN ONTARIO
At D. & A. MacLeod Company Ltd., we strive to provide you with the knowledge you need to make informed financial decisions. If you need help building or repairing your credit rating, we can work with you to develop a solution based on your unique situation. We are licensed bankruptcy trustees, offering credit counselling in Kingston, Ottawa and many other cities across Eastern Ontario. Contact us today for a free consultation at 613-236-9111.