Financial Literacy: The Pros & Cons of Using a Credit Card

Last month, we launched our Digital Financial Literacy Program. Through this program, we provide financial literacy modules with easy-to-understand information to help people better understand their finances and make more informed decisions. To complement this program, we will be offering tips, information, and news related to financial literacy in blog posts.

In a previous article, we discussed the differences between savings and checking accounts. Today’s post is all about using credit cards wisely. Credit cards are a great financial tool for people and offer many freedoms. While using a credit card, it is important to be aware of the potential risks and benefits.

Every time you use your credit card to make a purchase, you essentially borrow the money from your credit card company. Typically you must pay the company back, partially or entirely, the following month.

The Pros:

• Building Credit – Using and paying off the balance on your credit card will build your credit history and help improve your credit score.
• Convenience – You can purchase an item and pay for an item later or over time.
• Protection – Many credit cards provide protection plans from fraudulent purchases if your card is stolen or compromised.

The Cons:

• Diminished Credit – Missed payments or late bills can severely damage your credit history.
• Interest – If you carry a balance on your credit card past the due date, you could pay interest on the amount borrowed.
• Too Easy – The ease of purchasing could lead to increased impulse-buying and irresponsible purchases.

Paying the Minimum – As we mentioned, a perk of having a credit card is the ability to purchase bigger ticket items and pay for them over time. Many people only pay the minimum balance on their credit card, or some amount lower than the total, to eventually pay back the full balance when they are able. While paying the minimum can be convenient, it’s smart to consider the total cost of your purchase if you pay over time. Credit card companies can charge high interest rates which only compound with time.  

For an in-depth look at how and when to use credit, including a credit card bill breakdown and minimum payment module, check out Credit Use, a section of our Financial Literacy Program.