Credit cards are the best tool for establishing a good credit history, vital in so many areas. Used responsibly credit cards can reap dividends in cash backs, offer extended guarantees and warranties, and various insurance perks. Ironically those who least need to use credit benefit the most from astute use of credit; whilst those who believe they need credit at any price are the least capable of managing it well and would be better off not using them.
Many people simply see credit cards as a route to free money, failing to understand the implications of the credit card agreement. Many sign on the dotted line having never read the terms and conditions, mislead by the headline interest rates. Many credit card agreements are simply incomprehensible to those without any financial literacy skills, thus they are disregarded.
Those without money management skills often seek out credit cards without any comprehension that the interest rate which attracted them was only a sample rate based on credit worthiness that they failed to measure up to. The perils of cash advances and penalty interest rates remain unknown as the time was never invested to understand them.
Those with bad credit are particularly vulnerable to falling for the concept of credit at any price. Credit cards with exorbitant interest rates touted by sub prime lenders often feature a range of charges which account for 25% of the immediate credit level, the maximum amount of fees allowed under law.
Many sign up having failed to understand the fee structure, unaware that their immediate credit line is only 75% of the credit advanced. Struggling to cope with the fees, they carry balances that in some instances carry interest rates of over 60%. Some debtors even walk out of bankruptcy court and their first intent is to find a new credit card.
Some people should never have credit cards as they simply cannot control their spending and fail to realize the dangers of running up debts which attract compound interest. Their solution when cards are maxed out is to apply for yet more credit, trapping themselves in a debt cycle that means everyday purchases may wind up on credit due to a lack of disposable income for necessities.
When it becomes necessary to use credit to exist from pay check to pay check it is a warning sign that should be heeded as one is living above ones means and likely to suffer the negative connotations of carrying debt.
Used irresponsibly credit cards can destroy a person’s credit score, making it much harder to address financial needs in the future. It can become difficult to obtain a mortgage or other forms of loan unless a premium interest rate is paid, making future expenses unnecessarily high due to the risky financial reputation acquired.
Unless the basics of credit card use are understood, along with their pitfalls, those without basic money management skills should steer clear of credit cards. Unfortunately they are often the most desired customers for the credit card providers to make money from.