The Pros and Cons of Credit Cards

For years, credit card use was encouraged and personal interest was deductible. Economic instability during the late 1970s and early 1980s gave rise to numerous changes. Credit became tight, and as a result of the Tax Reform Act of 1986, personal interest was no longer deductible.

Over time, the economic nightmare became a memory. Credit card issuer competition increased. Consumers could negotiate for low fixed rate credit cards and there were stories of family pets receiving credit card offers.

Then, once again, everything changed. Bankruptcy laws were quietly tightened; variable rates replaced fixed rates; minimum payment requirements doubled; and maximum finance charges doubled or tripled. Credit card issuers were called before Congress concerning abusive practices. Personal finance, credit card use, and consumer credit became buzzwords.

So, are credit cards good or bad? The answer is "both" and "neither." Credit cards are a financial tool, much as a hammer or a shovel is a tool. You should use it when you need it then put it away.

Although credit card use may sometimes seem unavoidable, there are times when we can realistically make a choice. For those times, here are some pros and cons of credit cards:

Convenience
Pro: They reduce the need to carry cash or checks.
Con: They can lead to increased spending. Careful use of debit cards may be a better choice.

Cash Flow
Pro: They allow you to spread out the cash effect of purchases.
Con: Variable interest rates can be steep. Vendor layaway plans may be preferable if available.

Credit Rating
Pro: They can help those with little or no credit history to build a credit score for larger purchases.
Con: Seemingly insignificant changes such as cancelling an older card can negatively impact credit scores.

Member Rewards
Pro: Reward points can translate into cash or discounts.
Con: Conditions may attach and some cards include annual fees and other fees.

Balance Transfers
Pro: Transferring balances between cards may help reduce overall interest paid.
Con: Interest rates may significantly increase when the teaser period expires. You may pay more overall interest if you are unable to transfer the balance to another card.

Bottom line: Whether credit cards are good or bad depends on factors such as card issuer policies, specific card terms of use, and how you use that card. Credit cards are financial tools; as with any tool, they should be chosen and used with care.