Is a credit card right for you?

Barbara Duvall, Michigan State University Extension -

There are advantages and disadvantages of having a credit card. Looking at your bill paying habits can determine if you are the right fit for having a credit card.

A credit card can either be very helpful or a total disaster.  The following information by Michigan State University Extension can help you determine if you are a good candidate to apply for a credit card.

A credit card allows you to purchase merchandise or services without using cash.  You are essentially borrowing against your line of credit with the card company.  You are expected to pay off your purchases in monthly installments.  Let’s look at some of the advantages and disadvantages so you can make the right decision.

Advantages:

  • You do not have to carry a wad of cash in your pocket; if cash is stolen it can be difficult to recover.  If your credit card is stolen, many credit card companies have procedures that you can follow so that you are not responsible for unauthorized purchases made with the card.
  • You can make a sizeable purchase and spread the payments out over several months.  This can be very convenient if the item is expensive and you don’t have enough money to pay for it all at once.  Some businesses, like furniture stores, have a “no interest for six months” promotion. Note: It is wise to make monthly payments so that the purchase is paid off within the time frame and you don’t pay any interest on the item.
  • You can make purchases online or by phone and charge them to your credit card.
  • Many car rental establishments require a credit card.
  • Many credit card companies allow you to withhold payment an item purchased is defective.
  • Your credit card bills are a convenient summary of your purchases.
  • If your credit card bill is paid in full and on time each month, you can build a positive credit score.

Disadvantages:

  • Not handing over real cash allows you to spend more than you have in your wallet and may lull you into spending more than you can afford.
  • If you don’t pay off 100 percent of the balance each month you will incur higher costs due to the interest charged on the remaining balance.
  • If you don’t pay by the due date, you may have to pay late payment charges and penalty rates.
  • You may be tempted to get a cash advance; these typically come with additional fees.
  • While there is a process for unauthorized use of your credit card, it may take months to dispute, investigate and resolve.
  • You may be tempted to request or accept an offer for a higher credit card limit which may tempt you to overspend.

Here are several questions to ask yourself when deciding if you are the right fit for a credit card:

  • Do you pay your other bills such as rent, mortgage, utilities and loans on time?  If so, using a credit card may help you build a good credit score.  If your bill paying track record is not good, that can seriously hurt your credit score which will be problematic the next time you want to borrow money.
  • Do you pay your other bills in full when due?  If so, a credit card may be valuable because your money is able to stay in the bank or credit union and earn interest between the time you make the purchase and the time the bill is due.  However, if not, you will pay a steep interest rate on any outstanding balance so it will actually cost you more for the item than the original retail price.
  • Can you make charges on your credit card only what you have the funds to pay off each month?
  • Can you use a credit card to purchase only things that you would have paid cash for, and not more?

Essentially, whether or not a credit card is right for you boils down to one basic question: Do you have the self-discipline to use a credit card to your advantage and avoid instances where it can harm your financial security?  If so, use it wisely!  If not, avoid the temptation!

Young people can’t get a credit card in their own name until they turn 18.  However, they can begin to prepare themselves early to make a wise decision regarding credit cards.  The Michigan 4-H Youth Development Program has educational materials that can help young people learn to manage their finances.  Contact your local MSU Extension office to see if there is a 4-H club in your area that focuses on youth money management.

This article was published by Michigan State University Extension. For more information, visit https://extension.msu.edu. To have a digest of information delivered straight to your email inbox, visit https://extension.msu.edu/newsletters. To contact an expert in your area, visit https://extension.msu.edu/experts, or call 888-MSUE4MI (888-678-3464).

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