The current credit crisis that started with sub-prime mortgages is spilling over to other parts of the economy.  The default risk has increased significantly not only for mortgage defaults but also for other types of loans, including credit cards.  American consumerism and the overleveraging of personal finances, especially through the use of credit cards, is one of the reasons mentioned by many economists for the current economic slump.  Are credit cards bad for consumers and the economy?  Let’s take a look at the pros and cons of using credit cards in your quest for financial success.

Credit Cards as Foe

The average American owns multiple credit cards, and the majority carries a credit card balance of thousands of dollars.  If you only pay the required minimum on your credit card balance every month you will keep digging yourself deeper and deeper into debt, especially if you keep making purchases that you truly cannot afford.

Carrying a credit card balance is a huge financial mistake because the interest charge on the outstanding balance is nothing short of outrageous.  Many credit cards charge double digit interest, some approaching the 20% mark, or more.  When you consider that the prime rate, or the cost for these companies to borrow money is around 4%, the profit credit card companies make on your inability to manage your finances is ridiculous.  By charging you 20% interest, companies are pocketing 16% of your outstanding balance, or four times what it costs them to borrow money.  That is the equivalent of 400% gross profit!  Obviously credit card companies need to pay for marketing and default costs, so the net profit is not quite as high, but they are still taking advantage of people’s finance naiveté to make a significant amount of money.

If you don’t have a good handle on the amount of money you are spending on you credit cards and you let the outstanding balance accumulate from month to month, then credit cards are definitely your foe.

Credit Cards as Friend

Credit cards when managed properly can be not only convenient, buy they can also give you a financial edge.  One of the best ways to use credit cards to your advantage is to use a credit card that pays you cash back.  This can only work to your advantage if you pay your credit card balance every month and use the credit card as simply a convenience tool.  Here are examples of some of the best cash-back credit cards in the market:

• Discover Card®
• Capital One Cash Rewards
• Blue Cash® from American Express

For more information on this subject see the article How to Turn a Credit Card into a Cash Machine.

 

There are other ways to take advantage of credit cards to get benefits such as hotel points, frequent flier miles or even points that can be later used to purchase many different consumer products.

 

Even if you don’t take advantage of the cash-back or point-based awards, a credit card can be your friend at a time of financial crunch.  If you need credit to finance day-to-day spending in an emergency, credit cards can be a quick and convenient way to get credit without the hassles of applying for a loan.  The key here is to have a credit card that charges as low interest as you qualify for.   To this end, it is important to have a good credit score so that you will get the best interest rate possible.  One site that can help you manage your credit score is www.free-credit-reports.com .

 

One of the keys to financial success is managing credit well.  How you deal with credit cards is a good indication of your ability to manage credit and your potential to be financially successful.