Written by: Gilles Hudelot, Director of Education
Credit cards can really help you out when you are in a cash crunch. At the same time, they can become a barrier to your financial well-being if you do not practice caution and sound financial habits. As a result, it is impossible to say that credit cards are either “good” or “bad.” The reality is that there are plenty of credit card benefits and drawbacks. For the average person, understanding the pros and cons of credit cards is an important step toward building healthy financial habits and balancing the risks and rewards that come with credit card ownership.
The Pros and Cons of Credit Cards
- A credit card gives you access to money you may not have right now
- If used wisely, a credit card can help you build up credit
- You can take advantage of credit card cash-back or rewards programs
- It is too easy to use credit cards and spend more than you make
- Interest rates can quickly lead to a spiraling debt cycle
- Credit cards can negatively affect your credit score
Understanding the Risks and Rewards of Credit Card Debt
As you can see, there are several very good reasons to own and use credit cards responsibly. However, the emphasis has to be on responsible spending. If you are uncertain what responsible spending looks like, we can examine a hypothetical situation. Let’s say you have two primary credit cards. You use one on a semi-regular basis to supplement your debit card. You likely use it to make purchases, knowing that you will pay off the balance before the end of the month. This allows you to take advantage of any rewards programs without having to pay much (or anything) in interest.
Your second credit card is your “emergency” card. You don’t use it unless you absolutely need it. For example, if you get in a car accident and need to be rushed to the emergency room, you can put this credit card down to pay a large sum up front. While you should save this card for these kinds of situations, it is also important to remember that you need to use cards from time to time to ensure that they stay “active.” Why? Because if you have a credit card and never use it, your bank will eventually close the account. So, always remember to make infrequent, small purchases with your emergency card and pay off the balance as soon as possible.
In this scenario, credit cards are useful tools because they are being used wisely. However, credit card lenders make a lot of money because millions of people do not practice good financial habits with their cards. Perhaps they pay for something that they cannot afford or they use them for emergency expenses that cannot be paid off in a reasonable amount of time. In these situations, you can quickly fall into a downward spiral of debt. Over time, this will negatively impact your credit score, increase your interest rate, and make you lose more money in the process.
Though not quite as “responsible” as the example given above, there are many people who game the system, so to speak. They are very active in how they use cash-back rewards cards. By carefully managing how and when they make purchases and taking advantage of 0% APR periods, they maximize the benefits they can get from their credit cards. These benefits can often be used to cover travel expenses or other costs. However, this route takes a lot of time and effort because if you do not stay on top of it on a regular basis, you could end up in a lot of debt.
Even if you have had bad habits in the past, you don’t have to change them overnight. You can build good habits over time. You can even use credit cards to build credit slowly and take back power over your finances. Ultimately, you just need to evaluate your cash flow and determine how much you can reasonably spend with credit cards.
Educating Your Employees about Credit Cards With Mentoro
Mentoro can schedule one-on-one meetings for people who want to discuss strategies to manage their credit card needs. On our portal, we also have tools to keep track of your money and budget plans. This helps ensure that you are not starting or even continuing bad habits.
If you have already accumulated debts, we have tools to help look at your debt and develop strategies to pay it down as efficiently as possible. You can also see how much you can save by following the “debt snowball strategy.” At its core, this strategy requires you to line up all your debt, decide which one you want to tackle first, and then use that momentum to move from one debt to the next.
While our portal tools are great for seeing how much you save over time, one-on-one meetings make it even easier to devise a highly specific strategy for you. This is because a big part of getting debt under control is psychological and emotional. Talking directly with a financial expert can help prevent you from feeling overwhelmed and put you on the right course toward financial wellness.