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The credit card industry is more profitable than ever. Credit cards can make life easier by letting you make purchases without carrying cash around. The truth is that there are many disadvantages to using a credit card which can outweigh the benefits if you aren't careful.
Here are 10 disadvantages of using credit cards you should avoid.
Benefits of Using a Credit Card
There are many advantages to using a credit card. We covered this subject extensively in the article: Everyone Should Have A Credit Card: 10 Reasons.
Read both sides of the story to decide whether credit cards are better than debit cards for you.
1. Interest Payments
One of the most significant drawbacks to using a credit card is the interest payments you will have to make. The average credit card interest rate is about 16%.
Let’s say you have a $1000 balance on your credit card and only pay the minimum payment of $30 each month. You will pay off the balance in a short 45 months, that’s almost four years.
There’s a reason why Visa profited over $12 billion in 2021. Avoid carrying a balance and pay your bill in full every month.
There are some cases in which carrying a balance might be necessary.
When you need to carry a balance, find the card with no annual lowest APR possible, so you avoid paying a high-interest rate.
Another drawback to using credit cards is the numerous fees associated with them. These include annual fees, balance transfer fees, cash advance fees, and late payment charges, just to name a few.
A few cards do not charge any annual fees, balance transfer fees, or cash advance fees, so be sure to compare your options before applying.
Another way to avoid paying extra fees is by using your credit card for regular expenses like groceries and gas. You can rack up rewards points without worrying about incurring any additional charges.
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Just make sure you aren't overspending just to earn rewards – remember that it's always important to stay within your budget.
3. The Danger of Overspending
Overspending is one of the most common credit card pitfalls.
When you use your credit card to make a purchase, it's easy to lose track of how much money you have available in your account since no physical dollars are being spent on cards.
Avoid overspending by using a budgeting app or tracking tool to help keep track of your spending habits. Keeping track allows you to see where your money is going each month and how much extra cash you have available to pay off your balance.
If you are currently struggling with overspending, it might be best to take a break from using your credit card until you are more in control of your finances.
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4. The Minimum Payment Trap
If you constantly make minimum payments each month, it will take much longer to pay off your credit card debt, resulting in an excessive amount of money in interest costs.
If you have a $1000 balance on a credit card with a high-interest rate (APR) of 18% and only make the minimum monthly payment of $20, it will take you 111 months of debt payments (almost nine years) to pay off your debt. You will have paid more than $2000 in interest during that time. High-interest rates make it difficult to pay more than the minimum.
The credit card company loves when you keep credit card debt indefinitely. Do the opposite, and you can avoid paying a ton of interest.
5. Credit Card Fraud
Credit card fraud is a real problem that can lead to thousands of dollars in losses.
One way to protect yourself from credit card scammers and thieves is by using your cards at well-known, reputable businesses where they are required to use more secure payment systems such as a chip reader.
Keep an eye on your transactions and report any suspicious activity on your account right away. Scammers often will only charge $1 as many people don’t catch it.
6. Reduction of Future Income
If you're unable to keep up your credit card payments, the interest rates on any future purchases will likely skyrocket. Falling behind can lead to even more financial problems down the line and result in having a low or bad credit score which could affect your ability to buy things like houses, cars, etc.
The best way around this problem is simply by paying off all of your debts as soon as possible so that you don't spend thousands of dollars over time! It might take some sacrifices at first, but once you pay them off, it's much easier to build back up an emergency savings account (and good credit) again.
7. Could Negatively Affect Your Credit Score
If you're not careful, using credit cards can hurt your credit score. The amount of debt you have and your payment history are two critical factors that go into calculating your credit score.
The best way to avoid this problem is by always paying off your balance in full and on time each month. Paying each month shows lenders that you're responsible with money and can be trusted to borrow more in the future.
8. Deferred Interest Charges
When you first get a credit card, it's important to be aware of the deferred interest charges. You won’t pay interest on your purchases until after a certain period (usually six to twelve months). The credit card issuer will make this sound great by calling it a special 0% offer for a limited time.
Read the fine print about the promotional period. You’ll find out all your credit card interest rates in the fine print.
The best way to avoid this problem is by paying off your balance in full before the end of the promotional period. If you don't, you'll have to pay all of that interest back plus whatever else has accrued since making purchases.
9. Foreign Transaction Fees
Many credit cards offer no foreign transaction fees. Only choose one of the credit card companies that charge no foreign transaction fees. Why should you be charged just to spend money?
10. Surcharges for Cash Advances
There is a fee associated with taking out cash advances through their credit card. Cash advances are costly since the interest rates are usually much higher than what you would get on a purchase.
Avoid using cash advances when you don’t have enough money. They are not a good solution.
Avoid Credit Card Debt
There are a lot of disadvantages to using a credit card, but if you're careful and know what to watch out for, they can be a great way to build your credit score over time.
Credit cards are like fire. They can be used for building credit or destroying your good credit score.
It’s your choice.
As a certified credit counselor and syndicated writer at MaxMyMoney, Max has coached over 250 Millennials to help take the stress out of money. When Max is not coaching, you'll find him reading financial books, indoor cycling, or visiting local pawn shops looking for swiss-made watches.