It might feel like credit cards have been around forever, but they didn’t debut until 1950. Before then, being in any type of debt was considered taboo and a cause of shame. The only option was borrowing from a loan shark at ridiculously high interest rates, which was not only illegal but also nerve-racking.
Today, reaching for a credit card has become a normal and necessary part of life for most people. In fact, it has become so acceptable that it can be seen as a sign of affluence—especially if you pull out a luxury or premium card.
But when you consider that credit card debt in the U.S. jumped 18.5% to a record $930.6 billion in 2023 (according to CNBC), receiving your monthly bill could make you break out in a cold sweat. While credit cards can certainly help you enjoy life, you should reflect on their cost in the long run before reaching for one.
3 ways your credit card should scare you
Some financial analysts believe that rising credit card debt can be considered good for the economy. One of their arguments centers on financial confidence—when you are optimistic about your financial position, you feel more capable of paying it back.
While this may be true, there are three important credit cards facts you might want to consider:
1. It teaches you to rely on money you might not have
It’s important to remember that every time you swipe your credit card, you are using your creditor’s money. If you don’t have the funds to pay back the balance in full, you are essentially spending money you don’t have. The interest simply adds insult to injury.
Credit cards can trick you into thinking you have more money to spend – even if you don’t. What is even more alarming is that impulse purchases and other non-essentials could compromise your future financial security.
Think of it this way: You drink your only glass of water, despite not feeling thirsty. Later that day after a hot run, you only have an empty glass. Right when you need it the most, the water is no longer there because you already consumed it. The same scenario can be applied when it comes to using credit cards. Even as you earn money, you can no longer spend it as you wish because your balances are due.
2. It increases the risk of debt
Your credit card provides a spending limit that might be beyond your financial capabilities. With that much power, you may be tempted to overspend, which can quickly put you in the red.
Racking up debt can also damage your financial health, causing you to delay or miss out on major events like weddings, vacations, or buying a home. By using your cards responsibly, you can avoid this pitfall and stay on track with your finances.
3. It makes you pay more than you should
If you can pay your monthly balance in full, there’s a good chance you can avoid paying additional finance charges. However, you may be responsible for other credit card costs—especially if you own any cards that charge annual fees.
According to Chase Bank, annual credit card fees can range anywhere from $49 to $550. In return, cardholders can receive perks like airline miles, cash back or rewards by making purchases with the card.
Some credit cards may charge additional fees if you use the card internationally, make late payments, or exceed your credit limit. That is why it’s important to read the fine print before signing up for a new card. Otherwise, the cost could end up surpassing the benefits you receive in return.
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Are you ready for a credit card?
If you are considering taking out your first credit card, it is important to contemplate the main points below, according to Experian. If you already own a card, you do not have to ditch it due to poor choices—simply try sticking to the best practices suggested above.
You overspend often
If you have had issues with overspending in the past, it is important to get it under control before owning a credit card. Keep in mind that you don’t physically feel the money leaving your hand when you charge a purchase. This can make it harder to understand how much you are spending and how much you have left over.
You are already in debt
If you currently owe any type of debt such as a personal loan or medical bills, opening a new card may not be the best idea. You could end up burying yourself deeper into the red by adding one more fiscal responsibility to your plate.
You may still qualify for a credit card depending on your income and your ability to pay bills on time. In fact, a card can still help if you only plan to use it on essential purchases you would normally make with cash.
You want to avoid paying interest
The average interest rate for new credit card offers is 21.90% and 19.07% for existing accounts, according to WalletHub. If you pay your balance in full every month, you can avoid these charges. However, you should not open a new account if there is a chance you might fall behind.
As soon as you miss a payment, you will have interest added to the balance you carry over to the next month. If this continues, you could end up owing hundreds or thousands of dollars more in the end.
Can you stick to a budget?
Sticking to a budget can be challenging, especially if you have never done it before. But it is not impossible. Budgeting can help you create goals and track expenses to help ensure you achieve them. It requires financial discipline—just like a credit card. If you learn to control your expenses and allocate your money correctly, there is a good chance you can successfully manage one or more credit cards.
Spend wisely
While the very nature of credit cards is not always favorable, we can’t deny that they serve many useful purposes. Apart from the cashless convenience they provide, they also play an invaluable role in building credit.
To use a credit card or not to use a credit card – that is the question. The key is to understand how credit cards can make or break your finances. Once you have a better grasp, there should be nothing to be afraid of.
