Credit Cards: The Pros and Cons of Paying with Plastic

The average American reportedly has over $10,000 worth of credit card debt. As a certified accounting technician who has studied finances extensively, I'd like to discuss the pros and cons of using credit cards.

The pros of using credit cards are few, but the pros that exist are great ones.

Improve Credit Score - A credit card will greatly improve your credit score, especially if you pay off the balance in full each month. If it's not possible for you to pay off the balance in full, try not to charge more than forty percent of your total credit limit. Example: A visa that has a total credit line of $1,000 should not carry a balance of more than $400 (1,000 x 40% = 400) from month to month. Charging more than forty percent of your credit limit will cause a decrease in your credit score.

Emergencies - Credit cards are great for extreme sudden emergencies. Anything unexpected, such as a vehicle breakdown or the loss of a major household appliance, qualifies as an extreme emergency. Limit emergency use of credit cards to things you cannot live without.

Reward Points - Some credit card companies give reward points. Every dollar you spend on the card usually equals anywhere from one to three points. These points can be used as rewards for cash, gift certificates from popular merchants, cruise ships, etc. Basically anything you can think of is offered as a reward provided you have the required number of points for that particular item.

The cons of credit card companies are why many people struggle with debt. Hidden fees are disguised as a great deal or written in fine print so that the average person will not notice them until it is too late. Watch out for the common credit card pitfalls listed below.

Low Minimum Monthly Payments - Making the minimum payment every month gets you nowhere fast. You are just paying interest while your total balance may decrease by a few dollars, if even that much. Always pay more than the minimum payment when possible. It does not matter if it is just five dollars added with the minimum payment. Every dollar you pay over the required minimum decreases the overall balance and brings you closer to being debt free.

No Interest Promotions - Popular merchant credit cards (JC Penney, Dell, Home Depot, etc.) are famous for no interest promotions. They promise no interest for usually three, six, or twelve months if you sign up and make a purchase by a certain date. Only sign up for these promotional deals if you are sure you can pay it off before the interest free period ends. Example: If you made a $3,000 purchase with 12 months no interest, you would have to pay $250 per month (3,000/12 = 250) to get it paid off by the time the interest free period ends. Otherwise, interest will be added from the date of purchase, not when the promotional period ends.

High Interest Rates - Some credit cards literally kill you with their interest rates. If the card you are thinking of getting has an interest rate of five percent or higher, you will want to look for a better deal. Otherwise, you will pay triple the price for an item than if you had used cash.

Annual Fees - Annual fees on credit cards are just another way for the companies to make money. There are plenty of great cards with no annual fees so choose one of those instead. You will be glad you did.

All credit cards are not created equal. They can help as well as hurt your credit and score, depending on how you use them. Follow the tips outlined above and make sure to read the fine print thoroughly before you sign on the dotted line.

Sources: Personal Finance for Dummies, 5^th Edition by Eric Tyson;

College finance class, oral lectures by professor