The Benefits/Disadvantages of using a credit card

Question

Recently I was approved for my first credit card, and I was trying to find out the exact repercussions that using it would have on me, and my credit.

For now I've only been using the credit card for things I would buy normally and I pay them off almost immediately, usually once they post to my online account. However, I'm soon to be moving into an apartment and I'm contemplating using the card to furnish the apartment, paying it off over time, which I know is the point of the card.

What I'm wondering is, what kind of effects will usage like this have on my credit, and is it worth doing?

EDIT: There were more answers to this than I was ever expecting. Thanks for all of the responses. I got a lot of useful information from everyone. I ended up being inside of a 15 month grace period with no interest on purchases, so I did end up using the card more than I probably would have without that. That said, I'll be paying it all off today, and in the future this information is going to keep me from getting myself into a lot of trouble.

Answer 1

There are a couple of things to consider.

First, in order to avoid interest charges you generally just need to pay the statement balance before the statement due date. This is your grace period. You don't need to monitor your activity every day and send immediate payments. If you're being really tight with money, you can actually make a little profit by letting your cash sit in an interest bearing account before you pay your credit card before the due date.

Second, credit card interest rates are pretty terrible, and prescribed minimum payments are comically low. If you buy furniture using your credit card you will pay some interest, be sure to pay way more than the minimum payment. You should avoid carrying a balance on a credit card. At 20% interest the approximate monthly interest charge on $1,000 is $16.67.

Third, if you carry a balance on your credit card you lose the interest grace period (the first point above) on new charges. If you buy your couch, and carry the balance, when you buy a soda at 7-11, the soda begins to accrue interest immediately. If you decide to carry a balance on a credit card, stop using that card for new charges. It generally takes two consecutive billing period full balance payments to restore the grace period.

Fourth, to answer your question, using a credit card to carry a balance has no impact on your score. Make your payments on time, don't exceed your limits, keep your utilization reasonable. The credit agencies have no idea if you're carrying a balance or how much interest you're paying.

To Appease the people who think point four needs more words:

Your credit report contains your limit, your reported balance (generally your statement balance), and approximate minimum payment. There is no indication related to whether or not the balance contains a carried balance and/or accrued interest. The mere fact of carrying a balance will not impact your credit score because the credit reporting bureaus don't know you're carrying a balance. Paying interest doesn't help or hurt your score. Obviously if your carried balance and interest charges push your utilization up that will impact your score because of the increased utilization. Make your payments on time, don't exceed your limits, keep your utilization reasonable and your score will be fine.

Answer 2

Using the card but paying it off entirely at each billing cycle is the only "Good" way to use a credit card. If you feel like you will be tempted to buy more than you can pay back don't use credit.

As far as furnishing the apartment, the best thing to do would be to save and pay cash, but if you want to use credit the credit available at stores would be a far better deal than carrying it on a card.

Answer 3

Credit cards have three important advantages. None of them are for day-to-day borrowing of money.

1. Safety - Credit cards have better fraud protection than checks or cash, and better than most debit/check cards. If you buy something with a credit card, you also get the issuer's (think Visa) assurances that your will get the product you paid for, or your money back. At almost any time, if a product you buy is not what you expect, you can work with the issuer, even if the store says "screw you".

2. Security - Credit cards are almost universally accepted as a "security" against damages to the vendor. Hotels, car rentals, boat rentals etc. will accept a credit card as a means of securing their interests. Without that, you may have to make huge deposits, or not be able to rent at all. For example, in my area (touristy) you can not rent a car on debit or cash. You must use a credit card. Around here most hotel rooms require a credit card as well. This is different from area to area, but credit cards are nearly universally accepted.

3. Emergencies - If you're using your credit card properly, then you have some extra padding when stuff goes wrong. For example, it may be cheaper to place a bill on a credit card for a couple months while you recover from a car accident, than to deplete your bank account and have to pay fees.

Bonus - Some cards have perks, like miles, points, or cash back. Some can be very beneficial. You need to be careful about the rules with these bonuses. For example, some cards only give you points if you carry a balance. Some only give miles if you shop at certain stores. But if you have a good one, these can be pretty fantastic. A 3% cash back on purchases can make a large difference over time.

Answer 4

"paying it off over time, which I know is the point of the card"

That may very well be the card issuer's goal, but it need not be yours. The benefits, as your question title seems to ask for -

• Card issuer guarantee on transaction (i.e. no delivery, you don't pay)
• Extended warranty on product (mine doubles warranty up to a year)
• Consolidation of bills, one or two card bills per month, vs a dozen different accounts.
• Ease of tracking annual spending, one set of papers to go through.
• Ease of transactions - try to reserve a hotel room or rental car with cash.
• Safety - Do you really want to walk around with thousands of dollars in your pocket?
• Rewards/ Rebates - A good card will give you back 2% cash on every purchase. I have a 529 college saving account funder 100% with this reward. It will pay for more than 3 semesters of my daughter's college. In 19 years, I've paid Zero interest, Zero annual fee.

That said, use the card, but don't spend more than you have in your checking account to pay it when the bill comes.

What you may want to hear - "Charge the furniture. Pay it off over the next year, even at 20%/yr, the total interest on $2000 of furniture will only be $200, if you account for the declining balance. That's $4/week for a year of enjoying the furniture."

You see, you can talk yourself into a bad decision. Instead, shop, but don't buy. Lay out the plan to buy each piece as you save up for it. Consider what would happen if you buy it all on the card and then have any unexpected expenses. It just gets piled on top of that and you're down a slippery slope.

Answer 5

Credit card interest rates are obscene. Try to find some other kind of loan for the furnishings; if you put things on the card, try to pay them off as quickly as possible.

I should say that for most people I do recommend having a credit card. Hotels, car rental agencies, and a fair number of other businesses expect to be able to guarantee your reservation by taking the card info and it is much harder to do business with them without one. It gives you a short-term emergency fund you can tap (and then immediately pay back, or as close to immediately as possible). Credit cards are one of the safer ways to pay via internet, since they have guarantees that limit your liability if they are misused, and the bank can help you "charge back" to a vendor who doesn't deliver as promised. And if you have the self-discipline to pay the balance due in full every month, they can be a convenient alternative to carrying a checkbook or excessive amounts of cash.

But there are definitely people who haven't learned how to use this particular tool without hurting themselves. Remember that it needs to be handled with respect and appropriate caution.

Answer 6

Everyone else seems to have focused (rightly so) on the negatives of credit cards (high interest rates) and why it is important to pay them off before interest starts accruing.

Only Marin's answer briefly touched on rewards. To me, this is the real purpose of credit cards in today's age. Most good rewards cards can get you anywhere from 1-2% cash back on ALL purchases, and sometimes more on other categories. Again, assuming you can pay the balance in full each month, and you are good at budgeting money, using a credit card is an easy way to basically discount 1-2% of all of the spending you put on your card. AGAIN - this only works to your advantage if you pay off the credit card in full; using the above example of 20% interest, that's about 1.6% interest if the interest compounds monthly, which wipes out your return on rewards if you just go one month without paying off the balance.

Answer 7

One thing that has not been pointed out as a disadvantage of using Credit Cards: people tend to spend more. You can see This Study, and this one, plus about 500 others. On average people tend to spend about 17% more with credit cards then with cash. This amount dwarphs any perks one gets by having a credit card.

The safest way to use one is to only use them for purchases where you cannot make a decision to spend more. One example would be for utility bills (that don't charge a fee) or at the gas pump.

Using them at Amazon might have you upgrade your purchase or add some extra items. Using them at restaurants might encourage you to order an extra drink or two. Using them at the coffee shop might have you super size your coffee or add a pastry.

Of course this extra spending could lead you into a debt cycle exacerbating the financial hit many struggle with. Please tread carefully if you decide to use them.

Answer 8

Note: this answer is true for the UK, other places may vary.

There are a couple of uses for credit cards.

The first is to use them in a revolving manner, if you pay off the bill in full every time you get one then with the vast majority of cards you will pay no interest, effecitvely delay your expenses by a month, build your credit rating and with many credit cards you can also get rewards.

Generally you should wait until the bill comes to pay it off. This ensures that your usage is reported to the credit ratings agencies.

In general you should not draw out cash on credit cards as there is usually a fee and unlike purchases it will start acruing interest immediately.

The second is longer term borrowing. This is where you have to be careful. Firstly the "standard" rate on most credit cards is arround 20% APR which is pretty high. Secondly on many cards once you are carrying a balance any purchases start acruing interest immediately.

However many credit cards offer promotional rates. In contrast to the standard rates which are an expensive way to borrow the promotional rates often allow you to borrow at 0% APR for some period. Usually when it comes to promotional rates you get the best deal by opening a new credit card and using it immediately.

Ideally you should plan to pay off the card before the 0% period ends, if you can't do that then a balance transfer may be an option but be aware than in a few years the market for credit cards may (or may not) have changed.

Whatever you do you should ALWAYS make sure to pay at least the minimum payment and do so on time. Not doing so may trigger steep fees, loss of promotional interest rates.

There is a site called moneysavingexpert that tracks the best deals.

Answer 9

In the UK, using a credit card adds a layer of protection for consumers. If something goes wrong or you bought something that was actually a scam, if you inform the credit card company with the necessary documents they will typically clear the balance for that purchase (essentially the burden of 'debt' is passed to them and they themselves will have to chase up the necessary people).

Section 75 of the Consumer Credit Act

I personally use my credit card when buying anything one would consider as "consumer spending" (tvs, furniture ect). I then pay off the credit card immediately. This gives me the normal benefits of the credit card (if you get cashback or points) PLUS the additional consumer credit protection on all my purchases.

This, in my opinion is the most effective way of using your credit card.

Answer 10

The thing you need to keep in mind is that if you take on debt, you need to have a plan to pay it off and execute on it. You also need to understand what your carrying cost is (what you will pay in finance charges every month.) There are times when you need to take on debt in order to be a productive person. For example, in many places in the US, you need a car in order to have a job. It's ludicrous for someone to assert that you shouldn't take on any debt in order to get a reliable vehicle. That doesn't mean you go out and lease the fanciest car that you can get on your income.

In this case, I'd say it's a bit of a grey area. Could you live in an unfurnished apartment for a while? Perhaps. Many people would have a hard time living like that and it could affect your ability to perform at work. I would argue that buying a decent mattress to sleep on falls under the same category as getting a car so that you can work. You don't want to be missing work because your back is in spasm from sleeping on the floor or a worn out mattress.

As far as the rest of it goes, it really depends on how fast you can pay it off. If you are looking at more than a few months (6 tops) to pay off the purchase in full, you should reassess. Realize that the interest you are paying is increasing the cost of the furniture and act accordingly. As mentioned, you can often get 0% financing for a limited period. Understand that if you don't pay off the entire balance in that period, you will normally be retroactively charged interest on the entire starting amount and that interest rate will likely be quite high.

The problem with credit is when you start using it and continually growing the balance. It's easy to keep saying that you will start paying it off later and the next thing you know you are buried. It's not a big one-time purchase (by itself) that normally gets people into trouble, it's continual spending beyond their means month after month.

Answer 11

One of the more subtle disadvantages to large credit card purposes purchases (besides what the other answer mentions), is that it makes you less prepared for emergencies.

If you carry a large balance on your credit card with the idea that your income can easily handle the payments to beat the no-interest period, you never know when you'll have an unexpected emergency and you'll end up having to pay less, miss the deadline and end up paying huge interest.

Even if you are fastidious about saving and budgeting, what if your family comes under a large financial burden (just as one possible example)?

Answer 12

never carry a balance on a credit card. there is almost always a cheaper way to borrow money. the exception to that rule is when you are offered a 0% promotion on a credit card, but even then watch out for cash advance fees and how payments are applied (typically to promotional balances first).

paying interest on daily spending is a bad idea. generally, the only time you should pay interest is on a home loan, car loan or education loan. basically that's because those loans can either allow you to reduce an expense (e.g. apartment rent, taxi fair), or increase your income (by getting a better job). you can try to make an argument about the utility of a dollar, but all sophistry aside you are better off investing than borrowing under normal circumstances. that said, using a credit card (with no annual fee) can build credit for a future car or home loan.

the biggest advantage of a credit card is cash back. if you have good credit you can get a credit card that offers at least 1% cash back on every purchase. if you don't have good credit, using a credit card with no annual fee can be a good way to build credit until you can get approved for a 2% card (e.g. citi double cash). additionally, technically, you can get close to 10% cash back by chasing sign up bonuses. however, that requires applying for new cards frequently and keeping track of minimum spend etc.

credit cards also protect you from fraud. if someone uses your debit card number, you can be short on cash until your bank fixes it. but if someone uses your credit card number, you can simply dispute the charge when you get the bill. you don't have to worry about how to make rent after an unexpected 2k$ charge.

side note: it is a common mis-conception that credit card issuers only make money from cardholder interest and fees. card issuers make a lot of revenue from "interchange fees" paid by merchants every time you use your card. some issuers (e.g. amex) make a majority of their revenue from merchants.

Answer 13

If you can use and pay off your credit card in full every month, there are plenty of benefits including improved credit, reward points and more. Many fall into the trap of just making the minimum payments and facing high interest charges or missing payments and getting a hit on their credit reports.

To start off, put something small that you know you can pay off every month. It could be your Netflix or your gas. Make sure you pay it off before any interest is accrued. Over time, you can ask for higher limits to boost your utilization rate.

Answer 14

I just want to stress one point, which has been mentioned, but only in passing.

The disadvantage of a credit card is that it makes it very easy to take on a credit.

paying it off over time, which I know is the point of the card.

Then you fell into the trap of the issuer of the card. They benefit if you pay off stuff over time; that's why taking up a credit seems to be so easy with a credit (sic) card. All the technical aspects aside, you are still in debt, and you never ever want to be so if you can avoid it. And, for any voluntary, non-essential, payment, you can avoid it.

Buy furniture that you can pay off in full right now. If that means only buying a few pieces or used/junk stuff, then so be it. Save up money until you can buy more/better pieces.

Answer 15

An advantage of using a major credit card is that they act as a buffer and source of recourse between you and the merchant. Cheated and the store won’t answer you letters? Call Visa (or more accuratly, call the number on the back of the card).

(That is, #2 on this answer, which you can also reference for a whole list of benefits.)

Answer 16

Personally the main disadvantages are perpetuation of the credit referencing system, which is massively abused and woefully under regulated, and encouraging people to think that it's ok to buy things you don't have the money to buy (either save up or question price/necessity).