Credit cards are useful, but potentially dangerous financial instruments. When used correctly, they offer security, benefits, and rewards that make them a vastly superior payment to cash, checks or debit cards. However, when using credit cards to incur revolving debt, there can be expensive drawbacks.
The Dangers of Carrying Credit Card Balances
Unlike a loan for a fixed amount, credit cards are revolving charge accounts. This means that borrowers can continue to incur additional debt each month, even as they make payments on their existing balances. For consumers, this is a hazardous aspect of a powerful financial instrument. Too often, cardholders make purchases without regards to their ability to pay for them, and must therefore carry a balance.
As time passes, this practice becomes a habit as they incur more debt at a rate faster than they are paying off their existing balances. Using 0% balance transfer credit cards can take the sting out of interest expenses, but oftentimes, consumers fail to use these low rate cards until they reach a point where their ability to make their minimum monthly payment becomes difficult or their credit limits are nearly exhausted.
In other circumstances, unexpected expenses or a short term income disruptions prevent cardholders from making their payments on time. Missing payments often triggers several even more dire consequences. Cardholders will be responsible for late fees and, if multiple payments are missed on the same card in a short period, a penalty interest rate in the high twenties can be applied to future purchases, essentially making the use of credit cards cost prohibitive.
Apart from late fees and increased interest rates, delinquent card-holders will see their credit rating suffer – effectively making it difficult to refinance at lower rates with 0% APR balance transfers – or find that their ability to charge new purchases is suspended. Needless to say, the penalty interest rates and late fees have the effect of compounding the financial difficulties that the cardholder is already facing. Without a sudden influx of income, delinquency can lead to default and possibly a personal bankruptcy.
Attempting To Manage Credit Card Debt
Charging purchases that cannot be paid in full each month can be a necessary evil, but as long as the cardholder confines the debt to a manageable level. While it is possible to do that, it is much more likely that cardholders will continue to spend more each month than they are capable of paying.
In this way, a level of debt that was once under control quickly becomes unmanageable. Even under the best circumstances, those who carry a balance forfeit the interest free grace period granted between the time of purchase and the statement due date. Consequently, those who carry even a modest balance still end up paying interest on all of their credit card purchases unless they happen to use a card like Chase Slate that provides the ability to choose which purchases are paid in full every month.
Ultimately it is very easy to incur debt using a credit card and very difficult to shake free of it without a long term financial plan that properly budgets for interest expenses and focuses on paying down debt rather than simply staying afloat. By understanding how small levels of credit card debt can result in increased costs at best – and an unmanageable burden at worst – individuals can start to make the correct decisions about their credit card use and harness the benefits of using plastic without the costly side effects.
