What the Credit Card Companies Do Not Want You To Know

credit-card

Ah this is a great topic for the holiday season…Credit cards are the best invention ever made right? Well, they may be a great invention for credit card companies (especially right around this time of year), but for the consumer that does not understand their impact, credit cards can be a nightmare. However, for consumers who do understand how to maximize the benefits of credit cards, while minimizing the drawbacks, that piece of plastic can be a beauty.

Why It Only Makes Sense To Have One Credit Card

In order to better understand why one should only carry one credit card, and one debit card maximum (in most cases), it is important to understand the concept of credit. When you swipe your credit card at Macy’s for a pair of shoes, you are essentially borrowing money from the company that issued your credit card with the assumption that you will pay that issuer back at some point.

Now, do you think a bank that needs to maintain a profitable business will let you borrow their money for free? Not a chance. Credit card companies will charge you interest ranging from ~7% on the lower end to 25% or more on the high end, and sometimes even higher.

This is an annualized rate, so if you have $5,000 of credit card debt outstanding, with a 20% interest rate, you will owe $1,000 after one year of holding that outstanding balance.

Credit Card Company Point of View

Many people who do not understand this concept will issue multiple credit cards aimlessly purchase items they may not need (Google Search: shopping addiction). Without a way to pay off these credit cards, one can feel very overwhelmed as accumulated interest over time will put a person further into debt.

It is important to understand that credit card companies do not mind if you accumulate large amounts of interest on your credit cards. In fact, take a look at the income statement of any major credit card company and you will see a trend: its major source of revenue is usually interest income from credit cards! Don’t forget, they also charge late fees when you do not pay your bill (usually within 30 days): roughly $35-50!

Benefits of a Credit Card

With all this discussion regarding the negative aspects of credit cards, you might be scared to own even one, but there are two main benefits to having a credit card in your back pocket.

1) It Can Help You Establish a Strong Credit Score

First of all, a credit score is very important. Every person that utilizes credit in any way (owning a credit card, mortgage loan, car lease etc.) develops a credit score that falls between the general range of 300 to 850.

Just like waiting to pay off your credit card bill will cause your credit score to decline, consistently paying off your credit card on time is a great way for a new user of credit cards to establish a strong credit score.

Why Is It Important To Have a High Credit Score? Any time you want to take out a loan for anything, the first thing the lender will look at is your credit score. If you have a high credit score, you can borrow money at a cheaper interest rate. For example, you want to buy a home for $500,000, but only have $100,000. A bank will generally allow you to borrow the remainder to purchase that home, and if your credit score is relatively high, you will pay less interest on that loan

Essentially, the best way to establish strong credit early is to have a low credit card balance (relative to your credit card limit) that you consistently pay off on time. This will show lenders that you are reliable.

 

2) It Can Be a “Life Saver” In Certain Situations

Let’s say you are traveling to Jamaica for vacation and you realize that you missed your flight to get back home, and all your cash is gone. (This has definitely happened to at least a few of us). However, you have your credit card to pay for that last minute flight home! Thus, it is important to have a credit card for protection in case circumstances like this arise.

Note that there are other exceptions. You may not have the money for something you really need, or even a life experience that you want to have. In those situations it can be acceptable to use a credit card, or even to have multiple credit cards. Some companies do offer serious benefits (free coupons etc.) as well by using their company cards, and if you are making purchases any way, it may be cost effective to own a company card at the locations you shop often at. However, be careful as the concept of multiple credit cards can be a slippery slope if you’re not cautious about your choices.

Enjoy Life!


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