Introduction

Credit cards offer a dynamic blend of many benefits, but these mouth-watering benefits can also be dangerous to your financial freedom if not handled carefully. When considering the Pros and Cons of a Credit Card its advantages make it the choice of many for payment, and an Experian study shows that an average American has a credit card balance of over six thousand dollars

Key Point: Pros and Cons of a Credit Card

Basic understanding of a Credit Card

Credit cards are a type of payment card given by a financial institution that can be used to make purchases and payments online or at brick-and-mortar locations. The institution provides the card with a maximum credit based on specific qualifications. The individual can spend the amount and repay it on the due date, along with any interest or service fees.

Pros and Cons of a Credit Card

Pros

  • Access to credit: 

Drawn from its name, a credit card allows an individual to make payment for goods and services below the limit of the card. The credit lending institution instantly pays the cost on behalf of the issuer, and the cardholder then repays the loan.

Access to credit is an excellent advantage as it allows people to pay for goods and services they need urgently and pay back the money. 

  • Builds credit score:  

A great way to boost your credit score is by securing a credit card correctly. Getting a credit card is not necessarily how you build your credit score; it is how that credit card is used and how the user repays the money. This is because each time a person requests a credit card, a credit reporting agency begins to follow through with the activities of that credit card. 

If the cardholder uses the card and repays in due time, it will build their credit score and allow them to qualify for higher credit cards and loans with lower interest.

  • Rewards, Bonuses and Benefits 

Every customer occasionally likes rewards, bonuses and benefits. Institutions that offer credit cards also sometimes provide bonuses. Rewards can be cash back, airline miles, hotel reservations, train tickets, etc.

Note- Very satisfying bonuses and offers often come from credit institutions that charge an annual fee. 

  • One of the most reassuring aspects of using a credit card is the robust security it offers. Your transactions are properly under check, and your bank will promptly notify you of any suspicious activity. In the event of fraud, it’s also much quicker to block a credit card than to recover cash. 

Cons  

  • Potential for excess spending 

While a credit card offers convenience, it can also lead to overspending, posing a risk for those who lack financial discipline. The ease of spending can tempt you to exceed your monthly budget, leading to a cycle of financial pressure. 

  • Potential Damage to Credit Score 

If used correctly, a credit card can result in an increase in credit score. The same goes for a bad attitude to a credit card. A huge credit debt will only result in a poor credit score. This will limit the access to low-interest loans that the cardholder can access. Lenders will go through customers’ credit reports to assess their customers’ creditworthiness, and customers with so many credit applications and huge credit debts are going to come across as suspicious to lenders. 

  • The interest rate can be high. 

Failure to pay your credit on time can result in an increased interest rate that can get as high as 30 to 40 percent annual interest rate. This is a potentially high-interest rate compared to other lending facilities available. 

  • It’s important to recognise that a credit card, while it can increase your credit limit, is not a magic solution to long-term financial challenges. However, with a solid understanding of personal finance and responsible credit card use, you can pave the way to financial freedom rather than digging yourself into a deeper financial hole. 

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Remember, the most significant financial help you can give yourself is to get financially educated and practice what you have learned. This understanding of your financial structure will empower you to make sound decisions that strengthen your finances.