Are credit cards worth the risk?

Ever since the first universal credit card came out (Diners Club, 1950), people have flocked to using credit cards. But with the extra spending power from credit cards, comes a higher level of responsibility.

You can decide to use or not use credit cards and be financially successful. I want to take an analytical look at the benefits and cons of each option, to help you decide which option is right for you.

I'm not here to convince you to go with any specific method, and I won't make you feel guilty with whatever you decide. In either case, you need to be mindful about your spending.

Cons of using Credit Cards

To start things off, let's go through the risks and drawbacks of using a credit card.

Credit Cards Make Overspending Easier

When I got my first card, it felt like I had access to a gold mine. I instantly thought: “Woah! I can now buy stuff without having the cash!

And that is what credit cards tend to do. They make us feel like we just got a pay raise.

When you have revolving credit card balances, you are spending future income.

Your credit limit is not the same as cash. You are giving yourself the ability to borrow money, with the expectation that you will pay interest on balances that carry over from month-to-month.

Credit card companies want us to look at our credit limit as an extension of our checking accounts. They want us to overspend because they know this is their money train. But spending more than you make can easily lead to a credit card debt death cycle.

One data point that is becoming alarming is that the average revolving credit card balance exceeded 2008 levels in 2018 ($1,055). This problem is widespread that appears to be getting worst.

Credit Cards Fees

When you carry a card balance from month-to-month, you will get charged interest. And with the average APR being 16.86%, these interest fees are astronomical ($113 billion in 2018, which includes other fees). On top of that 71% of credit card balances carry over from month to month.

There is a whopping $686 billion worth of credit card debt from consumers who do not pay off their balance every month. Only 30% of credit card users pay off their balance every month.

Here is a list of other fees some credit card companies charge:

  • Late payment fees
  • Annual membership fees
  • Foreign transaction fees
  • Balance transfer fees
  • Cash advanced fees
  • Over limit fee
  • Return payment fee

Some of these credit card fees are more obvious than others. But it is good to take a look at the fine print of each card you own to understand their fee structure. For example, if you are doing international traveling, you may want to use a credit card that doesn't have a foreign transaction fee.

The highest credit card fees usually come from taking a cash advance from your credit card. You not only will start paying interest on the day of the transaction, but you will have to cough up a hefty transaction fee.

In 2018 we ended up paying around $5,500 in credit card interest charges. This credit card interest was from all of the debt we had accumulated through the years, and this is money that would have been cash in our pockets if we didn't go into debt!

Risk of Missing Credit Card Payments

When you use a card, you will want to make sure to at least cover the monthly minimum payment.

In addition to paying late payment fee, you could also end up hurting your credit score. This credit score hit isn't the end of the world, but it could mean you qualify for a lower interest rate on a mortgage in the future. It is a good idea to keep an eye on your credit report and credit score to make sure it is accurate.

The more cards you have and use, the more time it will take to make sure you are on top of your credit card accounts.

Credit Card Fraud

By opening a credit card account, you are opening yourself up to possible credit card fraud. And this isn't just about unauthorized purchases. The compromised data could potentially be used to steal your identity (which is a much larger issue).

How can your credit card be compromised?

  • Getting access to your physical card, which could happen at a restaurant or store
  • Spyware, malware, or a virus on your computer (or any computer/electronic device you use) that records your card information when you make a payment on a website
  • Your credit card number and information is susceptible from being hacked from a payment system that stores your information. This data can then be sold on the black market to the highest bidder

Below I'll cover why these things are not reasons to avoid using credit cards, but it is worth understanding the risks.

Budget Complexity and Credit Score Risk

Having many cards means you have to keep track of multiple accounts to make sure you aren't going into credit card debt.

You also run the risk of hurting your credit score if you have too many accounts. Many factors go into your credit score, including the length of time each account has been open, and if the account is active.

If you are going to use credit cards, make sure you are actively keeping an eye on the transactions going through.

Using cards means you have to be on top of your spending since it is so easy to carry over credit card balances. When you only pay with cash or a debit card, you are limiting the amount you can go into consumer debt.

Benefits of Using Credit Cards

Now it is time to take an in-depth look at the benefits of using credit cards.

Credit Cards can Simplify Budgeting

Too many cards can make managing your budget more difficult. But if you can limit the number of credit cards you use for your regular monthly spending, it can make managing your budget easier.

The key is figuring out a system that makes it easy to view credit card transactions and reconcile against your budget. YNAB handles this like a champ. It also allows you to see the balances of your cards quickly.

You can also reduce the risk of missing a payment and preventing credit card interest charges by setting up each credit card to autopay the balance owed every month. This option reduces most of the risks in using credit cards and saves you a ton of time. But you have to have a responsible budget that is actively maintained for this to work.

Credit Card Rewards

Do you like to travel for free? What about cash back rewards?

Credit cards offer many rewards on spending you would make anyway.

Are these rewards going to change your life drastically? Probably not. But they are also not insignificant either. For example, last year we went on a trip to Walt Disney World. We were able to cover half of the plane ticket costs with points ($800 savings), plus we paid for half of the hotels during the trip ($1,200 savings). That ended up saving us $2,000 on this trip!

Many blogs talk about travel hacking, and most of them deal with how to get the most out of credit card rewards. For example, Life Before Budget posted an article that talked about how they traveled to NYC, mostly using credit card points.

If you can manage your budget responsibly (however you define “budget”), credit cards can be a useful tool in providing valuable experiences for free or at a discount.

Automatically Pay off Credit Card Balance

I mentioned this above, but I want to emphasize this point directly.

Most of the risks using a credit card are eliminated if you set them up to automatically pay off every month.

Every credit card that I have used has this feature. It is harder to do this if you have credit card debt you are trying to pay down actively. But you can always set the cards that you are not focused on to automatically pay the minimum balance, and then handle the others manually.

Increased Credit Score

If you are paying off your credit card balance every month, and actively using your credit cards, your credit score will improve with time. That is because you are proving that you can manage your money and can be relied upon to pay off your debts.

If you think you might purchase a house or get a car loan in the future, a high credit score can get you a better rate. Having a high credit score can else help in qualifying for business loans.

At first, this might not seem like a big deal. But being able to save 0.5% on interest can save a ton of money over the full term of the loan. When you do need to borrow money, having a high credit score gives you more options. And I'm all about more choices and saving money.

Unauthorized Purchases on Your Credit Card

The good news is that most credit card companies do not hold you responsible for unauthorized charges. But that means you have to be cognitive of all transactions going through your account and notify them ASAP.

We had a situation where I noticed a charge that came through that my wife and I did not make. After confirming this indeed was not a charge we made, I called AMEX to dispute the charge, and our account was credited within a few days. Just make sure the charge wasn't done by you (or your spouse), as sometimes charges can go through merchants with a name that you don't recognize. You don't want to dispute charges that you legitimately purchased!

With all of this in mind, I don't want you freaking out about paying for things with a credit card. Because honestly, there is always going to be a risk regardless of your payment method. With cash, you risk losing the physical money. If you write a check, someone could gather your personal information (account number, routing number, address, etc.).

The good news is that if you are shopping at large online retailers, they have complex security systems in place to prevent hackers from getting your information. If you are using a PC (and not a mac), I highly suggest you install virus and malware protection. Outside of that, as long as you are smart about the websites you visit and are keeping an eye on your credit report, I wouldn't worry about being compromised too much.

Unauthorized charges are much easier to dispute and rollback than other payment methods.

In other words, using credit cards is safer and more reliable than other payment methods.

If you do think your credit card was compromised, contact the company. They can quickly put a hold on your account and issue you a new card with a new number.

Credit Card Fees Are Easy to Avoid

As long as you are aware of the fees each of your credit cards has, it should be reasonably easy to avoid them where it costs you very little in having that card. I recommend you create a spreadsheet of all of your opened credit card accounts that list the interest rates and the corresponding fees + benefits of each card.

The cards that have the best rewards usually have an annual membership fee. In most cases, the rewards easily pay for themselves, assuming you use the rewards. But you want to make sure the fee justifies the card, and how you plan on using it in the future. Most of these type of cards also have a minimum amount you need to spend in a specific time frame, so be mindful in what your plan is.

Avoid taking out cash advances will save you a ton of money. These are usually the highest credit card fees you will pay.

Do we use credit cards?

Most of the purchases we make are on a credit card. Below are the reasons we use credit cards:

  • Makes budgeting easier
  • Unauthorized charges are easier to dispute
  • Our credit score has continually gone up because we use and pay off our credit cards
  • We like free money and rewards
  • Setting up our accounts to automatically be paid off every month, and using YNAB, means the risk of going into credit card debt is low
  • We avoid credit card fees like the plague

If you are trying to figure out if you want to use credit cards, there is one question you should ask yourself:

Do you trust yourself in using credit cards responsibly?

In my case, I partially trust my spending patterns. But I've set up systems to make going into credit card debt more difficult. Every card transaction that gets pulled into YNAB has to be assigned to a budget category. If I am overspending, that category becomes yellow, and YNAB will show that I have a revolving balance on that credit card.

If you have struggled with credit card debt in the past, that doesn't mean you should not use cards. That just means you need to make sure you set up systems that keep you accountable and on track towards your financial goals. You should not use credit cards and expect them to be maintained automatically.

No one is going to care more about your financial future than you. Credit cards can be a useful tool if you are mindful and organized with your spending.

You might decide that you are at a point in your life where you cannot have any risk in spending more than you make. If you are married, this means you also have to trust your partner. This decision only you can make, and I hope you found this article helpful.

Do you use or not use credit cards? If you do use them, how do you prevent yourself from going into credit card debt?

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