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My Love Hate Relationship with Credit Cards

With the total amount of credit card debt now topping $693 billion [3] or $6,500 [4] per household, personal finance gurus may largely shun their use and existence but consumers continue to embrace them as a vital part of their financial portfolio. As a result of this divide, the internet is full of articles arguing both sides of this controversial financial topic and if we’ve all learned anything from all the reading, most of the authors, (including myself most of the time) had a definite opinion and aren’t interested in presenting the other side.

For this article, let’s try to be a little more fair and balanced and concede that both sides could make some valid points. What are they? Let’s take a look.

The Pros

People who don’t subscribe to the idea that credit cards are largely hazardous to your wealth may first say that a credit card used by a responsible consumer can produce rewards points [5] and provide short term credit interest free if the bill is paid in full each month.

They would also say that a credit card, when used responsibly, is good for your credit score since you proving that you don’t get in over your head to the point where you can’t pay your bills.

Another pro might be that credit cards may offer additional warranty coverage for large purchases along with the right to dispute the charge if the product or service doesn’t live up to the contract. If you pay in cash, you have little or no leverage when a dispute arises.

Finally, with cash becoming more and more antiquated, you may need a credit to purchase online or put a deposit down on rental cars, hotels, or other services. Sure, you could use a debit card for that but as we’ve all learned, it probably won’t be long until banks are charging us a monthly fee for the use of those debit cards.

The Cons

The largest problem with credit cards isn’t with the card but the average consumers’ ability to manage their expenses. If the average household debt is $6,500 at 15% interest, that amounts to $975 per year in interest payments alone and that doesn’t include any fees that may be charged along with the payment of the principal balance.

Next, using a credit card is a bet on your future ability to pay the debt. None of us know what tomorrow will bring and although the chances are high that nothing catastrophic will happen to you any time soon, what if it does? How will you pay that debt? A 0% balance transfer [6] sounds great, but can you pay the 15% the card will charge after the promotion expires?

We don’t realize that when we owe somebody else money, we’re levered to them. Your credit card company may raise your interest rate, cancel your card, or change the terms. With the down economy still forcing consumers to use their credit card to pay for necessities, any changes in terms can cause unmanageable financial emergencies for those who rely heavily on their card in addition to adverse effects to their credit score.

Bottom Line

Both sides may find common ground if they agreed that credit cards, if used responsibly, aren’t as bad as they appear but to say that all consumers are using credit cards irresponsibly by choice isn’t fair either. For those living in a state of financial emergency, their credit card may be their only short term hope.

Our challenge as a country is to begin a nationwide aggressive financial education campaign that will teach children responsible financial habits that they can take with them in to adulthood.

(Photo: sovietmole [7])