Are credit cards always a good idea? What are the benefits of a credit card?
The competition between financial outlets for new business is very keen, so it has never been easier for people to get credit cards from several different issuers.
However, before getting a credit card it's worth understanding the potential pitfalls as well as the benefits of credit card.
The advantages of credit cards
Credit cards are convenient and are safer to carry around than cash. They are widely accepted online, in most stores, and are virtually indispensable for travel.
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They frequently provide insurance cover for goods and services that are purchased with them.
Consumer law in countries like the UK provides a broad spectrum of protection for consumers who purchase goods or services with credit cards.
When credit card users pay off their monthly balance in full, they pay no interest. This often means that up to 42 days free credit is available.
On top of that, many credit card companies offer bonuses to their customers. These come in many forms. A popular one is cash back on payment of the balance, while another common one is air miles.
The disadvantages of credit cards
There is an unfortunate tendency for people to treat credit cards like they are extra cash. This makes people drop their guard against impulse spending.
The reality is that a credit card does not increase anybody's available spending money. Interest rates are very high, and people can quickly find themselves in a serious debt situation if they allow their credit card balance to grow month by month.
To see how much credit card interest will cost simply use our calculator:
Additionally, when people are paying interest on credit card purchases, they have effectively paid more than the list price for every item they bought.
The problems with credit cards
When people sign up for a credit card, they rarely read the full terms and conditions. In the UK credit card companies are obliged by law to highlight key features of their terms and conditions, such as the APR.
Unfortunately, there are hundreds of other conditions attached to cards. For instance a card provider may hold you responsible when their credit card is fraudulently used to obtain cash from ATMs. This responsibility should be stated in the terms and conditions.
It is up to a you to prove that he or she did not let the PIN number fall into criminal hands. This is something that is very difficult to prove.
You should also be aware of the procedures they need to follow should their credit card be lost or stolen. Failure to report the loss promptly could leave you having to pay for goods purchased with the missing card.
This can be particularly traumatic if the loss occurs when you are abroad. Most people neglect to take with them contact details for the credit card issuers, and you may find it impossible to get the card cancelled.
Another problem that can occur is when you who cannot meet your payments on one credit card and use another credit card to withdraw cash to pay the balance on the first card.
This type of action can cause a rapid spiral into serious debt. Cash withdrawals always attract interest charges, so the debt increases instantly as soon as money is withdrawn.
Credit cards - Can be very beneficial
Although credit cards can be complicated, any credit card holder who has enough self-discipline to use the card properly can find it is a very useful tool that can even help to reduce monthly spending.
If a credit card is stolen, you have the opportunity to prevent personal loss, something that is not possible if cash is stolen.
Nevertheless, to avoid nasty surprises, it is worthwhile to know the rules, and to keep important telephone numbers of card issuers somewhere where they are easily and readily accessible.