Basic Summary of Credit Card Usage

Irresponsible credit card usage is one of the top problems facing millennials and teens as they embark on their journey to financial independence. It is discussed in a movie called Maxed Out, which mentioned two college students who committed suicide after incurring, what they considered, insurmountable debt loads. Here is a quick list of Pros and Cons of Credit cards and I follow it with detailed explanation of each. I will start with the Cons, because I feel that you should be fully aware of the dangers of IRRESPONSIBLE credit card use.

Cons

1. IRRESPONSIBLE credit card usage can wreck your credit score and prevent you from getting a car loan, an apartment rental, and even a job!!
2. Credit Cards are among the MOST EXPENSIVE sources of mainstream consumer financing. Many have annual interest rates (APRs) of 15%+
3. Paying only the minimum required payment every month will add HUNDREDS, even THOUSANDS of dollars to your original bill
4. Many credit cards (especially ones that have rewards) have annual fees. You need to generate enough in rewards to at a minimum cover those annual fees
5. It will take you years to build a history of timely payments but one or two late payments will cause immediate damage and wipe out years of progress
6. When you sum up all of the above, you get the cardinal rule of RESPONSIBLE credit card use: YOU SHOULD NEVER CARRY A CREDIT CARD BALANCE FOR ANY MEANINGFUL PERIOD OF TIME

I hope the above scared you. Good. Credit cards can be a very dangerous thing and ruin your credit score. Now keep the above in mind, when we discuss how you can make credit cards work for you

Pros

1. When used correctly, credit cards are the easiest and most efficient way to build up a great credit history and score, demonstrating to banks that you are a responsible adult
2. Many credit cards come with rewards, which can actually pay you for spending i.e. you can make money off the credit card companies
3. They are great to have in case of an emergency
4. They provide you with zero-loss guarantees if your wallet is stolen. Compare that to cash, which disappears
5. It is pretty much impossible to book a hotel, rent a car or buy a plane ticket without a credit card
6. They are accepted around the world. Some even have no foreign exchange fees
7. They are much easier to use than cash
8. Credit card debts can be discharged in bankruptcies (unlike student loans)

When comparing the lists above, you will surely note that the pros are longer than the cons. I firmly believe that credit cards are a good thing! They have helped me a lot in my life, but it is only because I have used them RESPONSIBLY. However, credit cards could be like a train – it is generally good, unless it becomes a runaway and then it will destroy everything in its path. POOR usage of credit cards will trump the benefits and the consequences of bad decisions become evident much faster than the results of prudent decision-making and diligence.

This is basically a quick summary of credit cards. It is not even Credit Cards 101. It is basically the first slide in your power point presentation that tells people what the presentation will be about. I will discuss all of the pros and cons in separate posts.