An Explanation of Credit Cards

Credit cards are an extremely useful way of paying for products and services. They are often more convenient than cash or checks, and they are almost universally accepted (including over the phone). Additionally, they are a great way for you to establish your creditworthiness. And some cards offer additional benefits, such as rebates, frequent flier miles, and insurance.

But credit cards are a mixed blessing. They can encourage excessive spending (which often results in serious financial pain for those who carry balances). Also, the interest starts accumulating immediately for new purchases on credit cards with balances. Additionally, unlike most loans, credit card debt doesn't have a required repayment schedule, which can be a temptation to pay only the minimum amount required and never pay off the full amount owed.

The system is designed this way; credit card companies make most of their profits from cardholders who pay just the minimum amount required, since they charge exorbitantly high interest rates on the money owed. We recommend credit cards only for those who intend to pay off the balance each month.

Let's face it: It can take just a few months to get into financial trouble and years to get out. Those who don't pay off the entire balance every month get penalized in two ways: they continuously pay interest on the outstanding balance, plus they pay interest immediately on any new purchases (as opposed to those who pay the balance each month, who are extended a grace period during which no interest is charged). Although debt is sometimes useful, there is a difference between good debt (a home, car, education, etc.) and bad debt (money borrowed with no specific plan of repayment, such as with credit cards, debt consolidation or overspending in all areas of a budget). Even though debt is a part of life, the key to preventing it from becoming destructive is knowing the benefits and hazards of using credit.