Credit cards can be quite dangerous for a person’s finances. But the key word here is ‘could be’. It all depends on the person in question and how much they spend, alongside how much money they have in their bank account.
So first, let’s detail how credit card companies make their money in an effort to answer how a reliance on credit cards affects financial habits.
When an application for a credit card is accepted, the person who applied then has a card they can use to buy things from the shops. This is obvious, but how credit cards make their money is they charge a high amount of interest on a card’s balance at the time the bill’s due. In addition to the initial charge, this balance can be carried over a period of several months, with each month adding further interest onto the bill owed if it’s not paid off in the first month or by the first bill date. This means they count on people not paying back the entire balance during the month that the money was borrowed. There is also one or two other ways they make money, but this is the main way especially when it comes to the average consumer.
So, this brings us to ‘how a reliance on credit cards affects financial habits’ or at least can do.
When a person has a credit card, they can spend money that they maybe don’t have in their bank account. This is dangerous, especially if their financial situation is not stable. Why is it dangerous? It’s dangerous because it puts you in debt to a company that will have no qualms in making the debt you owe them even larger. This can lead to the debt spiralling out of control eventually, even if it may not happen straight away.
Bottom line, credit cards can lead to people spending money they do not have and living beyond their means.
Now, if the credit card is used and the person who uses it does have the financial stability to pay the bill, this is no problem at all. They’ll only owe the money they loaned in the first place and nothing more, though they may choose to only pay a part of it off at a time. This minimises the amount of interest charged, though it still does lead to owing more money than was borrowed. It’s still not bad though if you can afford the extra interest.
So again, in summary, credit cards can have a bad effect on a person’s financial situation because the credit card gives them the ability to spend more money than they have.