Credit cards aren’t inherently good or evil. They’re financial tools, and while they can get people into trouble, they can also be used for good.
When used with a strategy in mind, they can actually be a positive financial tool. Here are 5 reasons why credit cards get a bad rap, and how you can avoid these problems.
1. Because They Have High Interest Rates
As of January 9, 2014, the average annual percentage rate (APR) for variable rate credit cards was 15.38%, and the APR on fixed-rate cards was 13.02%, according to Bankrate.com.
Some people with sterling credit are able to get lower interest rates, while people with sketchier credit histories may pay significantly higher interest rates.
To minimize the interest you pay on your credit cards, it really does pay to shop around before acquiring a new one.
If you have an established track record with a credit card issuer, you may be able to request and receive a reduction in your interest rate, though there are no guarantees.
However, the best way to avoid the problem of interest altogether is to only charge items you know you can pay off on your next statement, so that no interest accrues.
2. Because Rewards Programs Aren’t That Great
Rewards programs vary from frequent flier miles to spending points to cash back.
Interest rates on these cards are usually higher than on non-reward credit cards, so if you carry a balance you’re paying for those points or miles in higher interest charges.
Again, the best way to make the most of rewards programs is to keep spending to a level that allows you to pay off your bill every month, and then interest charges won’t apply.
Also compare annual fees on rewards cards. They may be waived for the first year or two, but you could notice a surprisingly high annual fee the third year.
3. Because It’s Easy to Dig Yourself into Debt
When you pay for things with credit cards, you don’t experience the immediacy of the transaction the way you do with cash, so it’s easy to overspend.
That extra appetizer or clothing accessory you wouldn’t have bought with cash may make it onto your bill if you’re using credit.
Additionally, if you only make the minimum required payment every month, interest rates can accrue to the point that over time your purchases cost you significantly more than if you had paid cash.
If you want to learn how much a $1,000 purchase costs when you only make the minimum payment versus paying only $10 extra each month, have a look at this video from Better Money Habits.
To avoid paying hundreds or thousands of dollars in interest charges, pay more than the minimum every single month. Better yet, avoid interest altogether and pay your entire balance every month.
4. Because They’re Too Convenient
You don’t get paid until Friday, but today there’s a terrific deal on a new Xbox game or jacket that catches your eye.
With a credit card in your pocket, you may not think the purchase through and buy something that ultimately doesn’t bring you much pleasure. You may even buy it and forget all about it shortly.
Had you left your credit card at home and used cash, you might have thought the purchase through more carefully or skipped it altogether.
To avoid overly convenient spending with credit cards, leave them at home unless you’re making a planned purchase.
Depending on your financial situation, consider making a rule that any purchase over $50 (or $20, or $100) must be considered for 48 hours first.
You’d be surprised how often you forget about that item you were sure you needed while you were in the store.
5. Because Fees Can Be Onerous
Make your credit card payment one day late, and you’ll be assessed a late fee that averages $35 that will be reported to the major credit reporting bureaus, potentially harming your credit score.
Most cards charge a fee for exceeding your credit limit, or they may raise your credit limit and raise your interest rate at the same time.
If you’ve paid on time for years or have never exceeded your credit limit, you may be able to get the issuer to waive the fee, but they aren’t obligated to and won’t make a habit of it.
Prevent these fees by setting up text alerts that let you know when payments are due and that notify you when you approach your credit limit. Many card issuers offer these tools for free.
Credit cards are tools, and can be used to make managing spending more convenient, or they can be used to dig yourself into unnecessary debt.
Being smart about choosing, using, and paying off your cards lets you enjoy the conveniences without unnecessary fees and onerous interest charges.
With credit cards, a little discipline and forethought can go a long way.
Mary Hiers is a personal finance writer who helps people earn more and spend less.