What are the advantages and disadvantages of credit cards?

In the UK it has to be said we have something of a credit culture and most adults in Britain are in all sorts of debt, not just mortgages but car loans, store cards, credit cards and a whole array of others. Do we really know what we’re getting ourselves into? What are the advantages and disadvantages of credit cards?

The truth is that in this modern world, and particularly living in the UK, you will struggle to get through life without borrowing money at some point and in reality that isn’t a bad thing. If you are careful, credit can be used to your advantage. Most adults use credit regularly for convenience and various other benefits without getting themselves into a debt spiral.

Of course to every decision there are upsides and downsides, so to help you make a more informed decision here are the pros and cons:

Pro: Improve Your Credit Rating

Using credit is essential for most people, and if you intend to have a mortgage at some point in your life you will need a credit history. When used responsibly a credit card will help you to build a strong credit profile so that lenders will be willing to lend to you when you need it. Of course that only works if you pay off your balances regularly and avoid late payments and charges.

Con: Ruin Your Credit Rating

Using credit responsibly will gradually improve your credit worthiness and if that is your goal there are few easier options than getting a credit card. Unfortunately, if you are not all that great with credit, getting a card could be your undoing. Making small slip ups, forgetting to pay your bill or going over your limit will quickly cancel out any benefit you are getting from using your card.

Pro: Free Short Term Credit

Credit cards, when used correctly, are great for emergencies. If you have an unexpected cost and you don’t have the immediate funds to pay for it then using your credit card might be wise. It is important to distinguish between emergency costs and negative cashflow though. Emergency costs are things like unexpected car repairs…not shopping bills.

Con: Interest Costs Money

Credit card balances are essentially small loans. Every time you make a purchase you are borrowing the money to do so, and you may have to pay for that loan. Most credit card companies offer 30 days without interest, so if you are savvy and sensible about paying off your balance this shouldn’t be a problem, but if you are not disciplined your credit card could end up costing you money.

Pro: Payment Protection

Credit card providers give you a lot more protection than debit cards, which means that if you pay by credit card and a transaction turns out to be fraudulent, you will find it much easier to get your money back and your losses will be limited.

Con: Risk Of Debt Spiraling

This is obviously the biggest issue of all and certainly one that is worth thinking about. When everything goes to plan credit cards are great, but if money is tight it only takes a small slip up and you start incurring charges and interest, as soon as you get behind with payments it is all too easy for your credit card debt to get away from you. It is up to you to decide whether the pros outweigh this risk and whether you can handle the debt responsibly.

Pro: Incentives and Rewards

Credit cards are big business, they make their money by charging merchants when you make a purchase. If you shop around you will be able to get a card that actually gives you cash back on your purchases – this is often around 1-2% and if you use your card a lot that can add up quickly.

Summary & Conclusion

So the question then is whether you should go ahead and get one? This is a personal decision and one that I can’t make for you, but you should decide what you want out of your credit card and whether the potential benefits outweigh the risks for you.

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