Understanding Credit Cards - Advantages, Disadvantages, and How to Avoid Debt

Using a credit card certainly offers convenience and perks - it is a lot easier to purchase goods and services, you can build your credit, and many companies offer benefits such as discounts for using a credit card. Like everything, using a credit card has its disadvantages, and if not used wisely, a credit card can create financial chaos. By reading the fine print, using a credit card for necessary purchases only, and paying off your balance each month, you can avoid credit card debt and live more financially free.

The explicit purpose of a credit card is to allow people to purchase goods and services with the card holder's promise to pay for the goods and services back at a later date. Cards are convenient to use when you do not have any cash on you and need to make a payment, though they also come in handy whenever a financial emergency arises, as they allow you to make an immediate payment without having to come up with money that you may not have. The downside of the convenience of credit cards is that too many people live for the moment and overcharge ("max out") their cards, getting themselves into trouble and spiraling down the road of debt and misfortune.

It is very important that you understand the different facets of acquiring credit and using credit cards so that you can manage your credit situation better. Everybody has a credit history; if you own a credit card, or financed a car or a mortgage, you have a credit history - if you have paid your creditors on time or in advance, you'll have good credit; the opposite is true if you have had trouble paying your bills on time. The fact is, bad credit can get you turned down for loans, financing for a car, or even a job. Having a good credit score is important as it affords you the financial security to acquire needed goods and services without hassle.

As stated previously, there are upsides and downsides to using credit cards. Keep the following pros and cons in mind before reaching for that credit card:

Pros:
A credit card can be used to purchase anything - practically all establishments worldwide accept them, and they can be used in place of money you may not have or for an unexpected expense that requires immediate (and usually, large) payment. Repayment is usually staggered, as credit card companies allow customers to carry a balance and not have to repay their credit card debt all at once. Lastly, they also offer people the opportunity to build their credit, and if a credit card is used wisely and payments are timely, a good credit history has positive implications on employment, loans, and mortgages.

Cons:
If not used wisely, credit card debt can really make your finances tailspin and put you into a cycle of debt and despair. The staggered repayment system that companies have in place plays tricks on peoples' minds, and people tend to get in over their heads and spend a lot more than they should. Consumers need to understand that this money needs to be paid back at some point; even if debt is repaid little by little, companies will charge you interest on what you don't pay off, and in many cases, the interest rate is pretty high. This is how credit card companies make their money, and in light of the recent crisis surrounding the industry, it is now more important than ever to keep these things in mind before pulling that card out of your wallet or signing that application. Also, keep in mind that unless you apply for a bad credit loan, having bad credit can prevent you from getting approved for a traditional loan, such as financing for a car or a mortgage.

So while credit cards can certainly make life a little easier for many people, if they are not used correctly, they could create a sizable financial burden. Remember to read over all terms and conditions carefully before agreeing to take on a credit card. Credit card companies like to play around with interest rates, and use all sorts of marketing tools to lure in new customers, such as variable and introductory rates. "Introductory rate" credit cards should be avoided, since they offer low rates initially before eventually skyrocketing. Variable interest rate credit cards tend to be more agreeable, though interest could be as low as 3% and then fluctuate higher and higher. It's always best to go with a credit card that offers a fixed interest rate, that way you know you're not paying more interest than you need to.

With that all said, keep the following things in mind before making that next purchase with your card:

• Never "max out" your credit card. Follow a budget, and exercise restraint. It will help in the long-run.
• Keep tabs of all your purchases, and save receipts. This will help you realize whether or not you are spending too much.
• Pay off your balance at the end of each month, that way you do not start accruing interest. Help yourself, not the credit card companies. While this may not be possible, if you use credit cards for vital purchases ONLY, this is certainly attainable.
• Your credit stays with you wherever you go; every financial decision you make is recorded in your credit history file. Don't risk a job or an important loan for an expensive item you don't need and can't afford - use credit cards wisely and choose a card that offers sensible terms and conditions.