Credit Cards: Pros, Cons, and Some Terms to Know

What is credit?

In short, credit is a loan. In the context of credit cards, the way that a credit card works is that a bank gives you a line of credit (a loan with a preset limit that you have the option to borrow from at will). They also give you a credit card, which allows you to access the money from that line of credit by using the card. In exchange, you pay interest on the balance (the amount of the loan that you have used and not paid back). The interest rate that you pay is specified in agreement when you get your credit card and is called the Annual Percentage Rate (APR). Typically, credit cards only charge interest on balances that remain after the payment due date every month, meaning that if you pay off your credit card in full every month, you won’t owe interest. While you can opt to not pay off your card in full every month, you must pay at least the minimum payment to avoid a penalties. This can be found on your statement or on the app/website where you pay your bill.

Should I get a credit card?

It depends on your individual circumstances. Here are some pros and cons of them to help you make a good decision.

Pros:

• Fraud protection: if someone steals your credit card info and uses it to make fraudulent purchases, as long as you report it in a timely fashion to your credit card company, you are not on the hook for the fraudulent charges.
• Earn points/cash back: Many credit cards offer rewards to users such as cash back on money spent via the credit card or points that can be redeemed for things like travel.
• Build credit: your credit history is used by companies when they are trying to determine if they should loan you money, such as when you are applying for a mortgage or a car loan, so building a *good* credit history can help with these loans.

Cons:

• Potential for mounting debt: if you accumulate too much debt, it can become a huge problem, both for your personal finances and for your credit score. With great power comes great responsibility.
• Fees: some credit cards come with annual fees, and many come with penalties for missed payments, so if you aren’t careful, your credit card bills can add up fast.
• Fine print: this is a double-edged sword as the fine print in your credit card agreement may contain things like hidden fees and penalties, as well as hidden hoops to jump through for things like cash back or intro offers. However, many cards also offer things in the fine print such as travel insurance, extended warrantees and return periods, and rental car insurance. For this reason, it is important to read through all of the fine print when making decisions about credit cards.

As you can see, there is a lot to consider when making the decision about applying for a credit card. It can be a powerful tool to enhance your life, but if used improperly, it can cause great harm, so it is important to use credit cards wisely if you do end up getting one and to live well within your budget.