Erica Sandberg is a prominent personal finance authority and author of “Expecting Money: The Essential Financial Plan for New and Growing Families.” She writes “Opening Credits,” a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.
Dear Opening Credits,
I’m a business major at Cal State-San Marcos. I have a question for you about credit cards. Describe the most beneficial and detrimental aspects of credit cards for consumers? Can you provide specific examples, too? — Zoe
Why do I get the feeling I’m helping you write a term paper? Just in case, I’ve given your question enough lag time so that you must have completed it and have your grade by this point.
So here is my credit card best and worst list. To demonstrate, I’ll use the example of you purchasing a new flat-screen TV for your dorm room.
The best aspects of credit cards
- Immediate gratification. Let’s say the model you want is $499, but you don’t have the cash to pay for it immediately. Rather than taking the time to save for it or hitting up your parents for a loan, you can charge it and walk out of the store with the TV. All you have to do is pay the bill in a couple of months, and credit cards become a cost efficient way to get what you want, when you want it.
- Safety and convenience. Shopping for expensive items with cash is risky. Lose your wallet and those TV funds are gone for good. Credit cards are an easy and safe way to shop. Yes, you can also use a debit card, but combine the delayed-payment option with the security and convenience of plastic, and charging can make a lot of sense.
- Consumer protection. Now assume you got a bum TV from a fly-by-night store close to campus. When you return it, you find the doors shuttered. If you charged the set, you’d breathe a sigh of relief since credit card purchases are protected by consumer-friendly laws that don’t apply to cash and debit. After attempting to resolve the problem with the retailer, you could appeal to your creditor, dispute the merchant’s credit card charge and possibly not have to pay.
- Rewards. The bestcredit cards have rewards programs. With these products, you can earn points redeemable for travel, cash, and goods and services with each purchase. If you charge regularly and pay the balance in full each month, you can come out ahead. Keep charging correctly and you’ll be flying home for the weekend with no debt and on your creditor’s dime.
The worst aspects of credit cards
- Temptation to overcharge. An open line of credit can be dangerously seductive. While you’re in the store looking at TVs, you may also spot a laptop that strikes your fancy. Just having the ability to spend more than you can afford to repay makes it easy to get in over your head. Exercising impulse control is essential.
- High interest and fees. You may plan to pay the TV off in three months, but life has a way of getting in the way of good intentions. So you make the minimum requested payments instead, and even skip a cycle or two. In that case, interest and fees would be tacked on to the balance. Soon, a bargain turns into costly debt. The only way to keep the cost of credit low is to pay balances in full and on time.
- The high, lingering cost of mistakes. It’s bad enough to be charged a $35 late fee for missing a payment, but the delinquency also winds up on your credit report. This black mark will follow you long after graduation. And guess what? Future employers and landlords aren’t real keen on inconsistent payments. Cardholders must take action to keep credit reports pristine.
- Identity theft. What can happen if your card is stolen while you’re shopping for that TV? If you report the crime early, you’re protected from having to pay for fraudulent charges. However, thieves who have honed their craft have a way of using the information contained on your plastic to apply for new cards in your name, thus starting an identity theft nightmare. It is of critical importance that you always know where your cards are, scan statements for anything amiss and report problems early.
There are plenty more positive and negative aspects of credit cards, but these are the four best and worst. Now what did your professor say?
See related:10 things you must know about identity theft, How to dispute credit report errors, 10 things you must know about credit reports and scores, 5 key federal laws help protect cardholders, 5 secrets to smart debit card use
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