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Growing up, I heard varying opinions on credit cards. Aunts and uncles told me never to have one and to stick to debit cards. My parents told me to have two, so I could build credit. Financial advisors told me only to use cash for purchases to cut down on spending.
I was stuck on who to listen to. Was there an exact right answer on what to do? I had already heard the horror stories of credit card debt, and having a card declined because it was maxed out. What option would provide the best opportunities and lifestyle for my family and future children? I found out there’s good and bad to credit cards. Here’s a quick look at the benefits and dangers of credit cards.
Why Do You Want To Get A Credit Card?
When deciding whether to get a credit card or which one to choose between, the first step is identifying why you want to get a credit card. Credit cards have many benefits when used correctly.
Top Reasons People Get A Credit Card
There’s many reasons that people choose to get credit cards. Here’s some of the more popular reasons for having a credit card.
To Build Their Credit Score
Building your credit score opens more opportunities and a better lifestyle for your family. A good credit score is typically required to apply for an auto loan, house loan, or a small business loan. The higher the credit score, the lower your interest rates will be.
Homes and more expensive cars require a credit check too. Lenders want to make sure you can pay them back. Also, a higher interest rate will make monthly payments more expensive, and that extra money will add up over time.
Lenders don’t like to work with borrowers with poor credit. When they do, borrowers typically end up with higher interest rates.
Cashback Rewards Benefits
Credit companies create incentives for using their credit cards. One of these incentives is the cashback rewards feature of many credit cards. A Cashback reward is when the consumer receives a percentage of their spending back. You can often use your cash back rewards for a direct deposit to your bank account, a reduction of your credit balance, or a gift card.
I use my cashback to reduce my credit balance, but I know other families who use their cashback rewards for gift cards for date night.
Cashback rewards are worth researching. On the high end, some credit cards can return up to 5% while, on the lower end, 1%.
There is a whole community of writers and bloggers who write on travel rewards from credit cards, and it is for a good reason, too, because the benefits you can gain from it are endless. As you spend money, you earn points to use for flights and hotel stays.
More travel points mean less expensive trips for your family. Traveling with even a family of four becomes costly as you book hotels. Sometimes flights are out of the question. Because of travel points, more families can create memories while spending less money.
Different credit cards, optimized for travel benefits, come with varying rewards. Do thorough research on the benefits of each one before you sign up because some can give high point values for restaurants while others have a higher point earning value for gas stations.
The Signup Bonus
On that same point, most credit cards also come with a sign-up bonus for choosing their card. The signup bonus could be a higher cashback percentage, more travel points, or a multitude of benefits.
Also, most credit cards give additional rewards for referring a friend or adding an authorized user to your account. If you are married, adding a spouse as an authorized user will benefit the whole family.
For example, if the customer spends at least $4,000 on purchases in the first three months, the Chase Sapphire Preferred card rewards customers with 50,000 Chase Ultimate Rewards points. From there, those points can be used for booking trips and securing hotel reservations.
They Maxed Out Other Credit Cards
The most dangerous reason for opening another credit card is because someone has maxed out all their other ones. The highest priority for this person should be paying off their credit card debt before they open another one.
The Danger Of Credit Cards
What makes a credit card dangerous? Let’s go into some of the hazards before deciding to apply for a new card.
Credit Cards Will Allow You To Spend More Than You Have
When you open a credit card, it comes with a set limit of how much you can spend. This limit is based on your creditworthiness. But lenders don’t know how much money you have to spend. Therefore, if you spend more than you have, you end up with credit card debt.
Remembering To Pay It Off At The End Of Each Month
Credit card companies want to make money off you. In reality, they do not want you to pay off your credit balance at the end of each month because then they can make money off of you in the form of interest. If you forget to pay the balance off at the end of the month, they will charge interest on what you owe.
A Low Credit Score
A low credit score can be crippling. It has the potential to keep you from buying a house, getting a business loan, purchasing a new car, and overall results in higher interest loans. Also, the higher the interest loans, the more money out your pocket.
Are Credit Cards Helpful Or Dangerous?
Credit cards have the potential for both good and evil. If you are good with money and keeping track of your spending, credit cards can be beneficial. If you tend to spend your money before you have it, a debit card might be a better option to keep spending in check.
Credit cards may intimidate you because of the potential to result in a bad credit score and credit card debt. You just need to exercise caution when using one. Have a healthy fear and respect for them, but do not let it stop you from taking advantage of the benefits of having a good rewards credit card.
Lena Dungan is a freelance writer who specializes in personal finances, frugality, investing, and business entrepreneurship. She is passionate about coffee and teaching others how to start their own business. You can find her at jumpstartentrepreneur.com
What’s your favorite rewards credit card and why? Let us know in the comments below
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