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Posted in Personal Finance

The Hidden Dangers of Credit – A Post Requested by Readers

The Hidden Dangers of Credit – A Post Requested by Readers

Recently, we published a post on Advantages and Disadvantages of Credit Cards that grabbed a lot of readers’ attention. Since then, we have been receiving messages, mostly from students, that they would like to see something like an essay on the same subject. So, here it is.

An Essay on Advantages and Disadvantages of Credit Cards

Over the past few decades, we’ve all become used to having “plastic” in our wallets. Some use these cards only in the case of an emergency, while for others, it’s quite easy to flash the card several times a day and simply “charge it!”

In either case, credit cards can be both a blessing and a curse. These tiny 16-digit “piggy banks” may weigh less than an ounce, yet they can be extremely powerful – and if used improperly, the burden can literally feel like a ton of bricks.

The Advantages:

Before bashing credit cards too badly, there are several benefits that you can obtain by having them – and in fact, it is actually better to have at least some credit rather than no credit to your name at all.

One of the biggest advantages of having a credit card is that it allows you to build your overall credit history. Therefore, if you use your card wisely and don’t rack up a large balance, your credit score and report will look positive to lenders. This can give you the green light when it comes to other situations such as applying for a home or auto loan.

Having a higher credit score can help you in saving money overall, as those with higher credit scores are typically offered lower interest rates on loans and credit cards. While it may not seem like much, even a small difference in interest rate can add up significantly over time.

Another benefit to owning a credit card is that it can provide you with peace of mind while you are traveling. Should you need emergency assistance, you can use your card to obtain service and repairs, as well as for emergency lodging if you need it. Many credit card companies even offer additional services for travelers such as insurance for lost luggage and trip cancellation.

Certainly, another advantage of having credit cards is the rewards that they can provide. With so much competition in the credit card industry, cards need to differentiate themselves to consumers – and they oftentimes do so by offering rewards.

Some of these rewards may include:

  • Airline miles that can be redeemed for tickets
  • Hotel room vouchers
  • Gift cards for food and other services
  • Cash

The Disadvantages:

Unfortunately, even with all of the many benefits of credit cards, these financial vehicles still have a host of drawbacks – starting with their exceptionally high rates of interest. Rates can be as high as 20% or more – and for those who do not pay off their balance every month, the amount that is owed can begin to snowball out of control.

In addition to excessive rates of interest, credit cards are also known for their substantial fees. If a customer’s payment is even so much as a minute past the due date, they usually are charged a late fee. In addition, should that customer own other credit cards, these card companies are notified as well, oftentimes triggering a rise in interest rates across the board.

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