Credit Card Interest and Lines of Credit
Advantages and Disadvantages of having credit cards.
Pros:
- Credit cards offer great convenience so long as the bill can be paid off on time.
- Credit Card Reward programs can be beneficial.
- Cash back - getting a percent back from purchases is great especially if the gift selection is good or the value can be used against the monthly credit card debt.
Cons:
- A credit card is, in its simplest form, a short-term loan that can get very expensive. In the month of purchase, the buyer doesn't pay interest on the purchase. No interest is billed if the credit card bill is paid off in time. However, if you're missing the payment or you're only paying off in part, interest for the whole billing amount will be due. This is how credit card companies make their profit and this is how consumers get into (bad) debt.
- In view of this, it really is best to not use the credit card, especially for consumer goods. We've preached it a lot, but it bears repeating, save up first and be ready to pay off all credit card purchases when the bill comes in.
- Most people see the card as easy money - they forget how much they've spent on the month until they get the bill and gasp at how much they spent.
- Regarding points - those points are only useful if the client has the credit card expenses under control. Factor in the annual fee as well. It can negate any real savings.
- Cash back cards - make sure that all purchases are counted for to get a good deal. Many are for certain purchases only reducing the real value of the deal.
- Credit cards are so convenient that they get abused. In so many cases, that abuse turns into debt. How do credit card companies profit so much? They actually prey on people's inability to control themselves. People don't see the money as much as they see the card. The card represents simplicity. It doesn't hit home until the credit card bill comes in the mail.
- All credit card companies send out notices for new style cards: More points, carry balance forward at a reduced rate or cash advances. These are good options for those people that control their debt but for those of us that can't control credit card usage these are just more gimmicks that may create more debt. Yes, getting a new card and carrying over the old debt with a new low, low rate is a bonus but for a very limited time. The credit card company expects some or all of the debt to be repaid. They also expect that the card will be used to create more debt in the future. That is their business. They don't give out credit cards at low rates so people can pay off their debt then quit using the card. In other words, be very wary about credit card deals.
Line of Credit
If you have been budgeting and saving properly you should be eligible for a Line of Credit from your bank. These are important to have available. They are usually set at a reasonable interest rate and are immediately accessible.
As you gain strength in your relationship with your financial institution, you will probably become eligible for a credit line.
At this point though - it is still a loan and must be paid back. It is best used for emergencies only. Too many people see this great amount of funds just sitting there available for use. If used improperly it is BAD DEBT.
Yes, if there is credit card debt then it is best to pay it off with the line of credit funds to keep the interest charges down, but don't make a habit of this. It is debt. What a line of credit usually does is lower interest rates.