Credit Card Disadvantages - Yes There are Many!

Credit cards are everywhere; figures show that the average card user has over 4 credit cards in their wallet, and there are more cards in circulation that UK adults!

Lead us not into temptation

Credit cards give a real sense of buying power, but behind the gloss of such easy shopping is the reality that credit card balances are debt, pure and simple. Money spent on a card is money owed to the credit card company, and must be repaid at some point. It is all too easy to overspend on a card, especially when it is offering a high credit limit or a 0% deal of some sort.

Interesting facts

All credit cards will charge interest at some point. Their rates are expressed as an APR, (Annual Percentage Rate) and vary from introductory rates of 0% to over 30%. When introductory offers run out, the standard APR will click in and the debt will grow rapidly. Store credit cards often have particularly high interest rates.

Compound Interest

The effect of not paying off a balance is that interest charges compound. Say £100 is spent on a card. Interest is charged and so the total balance due becomes £100 plus the interest. The minimum payment is made against this new total. However, since the balance is not cleared, the next month interest is charged on the new total balance, which consists of the original balance, PLUS the previous month’s interest, PLUS any new purchases. This process continues unless the balance is paid off in full.

Payments Go Towards What?

Any repayments made go towards repaying the elements on the card that attract the lowest rate of interest, such as 0% balance transfers. This leaves the items attracting the highest rate of interest, such as cash advances, until last, therefore earning the credit card company more money. Again, this process continues unless the balance is paid off in full.

Minimum Payments

Credit card companies only require a minimum payment each month, usually about 2.75% of the balance or £5, whichever is more. However, simply paying the minimum will never clear the outstanding balance if the card is used regularly. Also, not making these minimum payments is the quickest way to get into trouble with the credit card companies. Missed payments also seriously affect the user’s credit rating.

The more cards, the better

It’s tempting to believe that the more cards held, the better for the user. Not so. Multiple cards have a raft of disadvantages:

• More temptation: more cards means more credit to spend, but simply holding more cards won’t increase the user’s income…
• More risk: if a wallet full of cards is stolen, the thief has more opportunity to spend the user’s cash, or steal the holder’s identity. Chances are, the user will also have trouble remembering all those PIN codes, so might do something daft (and against their credit agreement) such as writing the codes down or making the PIN code the same for all their cards.
• More credit rating entries: Multiple credit card applications over a short period of time actually have a detrimental effect on the user’s credit rating. In addition, holding more than ten cards at any one time (even if wisely used) can affect the rating too. Wise card holders cancel unused cards to free up their credit rating for any future applications.
• More interest: If multiple cards are left with outstanding balances beyond their special offer periods, interest can easily build up at different rates. Smart users clear balances or transfer them to 0% deals and then cancel the unused cards.
• More rewards: Cards that offer reward point schemes often need frequent usage to make these rewards useful or viable. Any benefits gained will undoubtedly be wiped out by interest charges if the full balance is not paid off each month.

Risk Assessment

Credit cards are easily stolen, and online purchases can be open to fraud. Credit card agreements now put the responsibility for security on the card holder, by insisting that details are kept secure on computers, and PIN details are never disclosed. Unfortunately, crooks are always trying to outwit these security methods, and use ever more sophisticated methods to extract details from unsuspecting card holders such as phishing.

Chip and PIN will help reduce fraud, but the high street still is lagging behind in implementing this technology. In addition, some PDQ machines still insist on printing the card number in full on receipts, so NEVER place till receipts in the same bag as purchases. If the bag is stolen, the thief gets the goods and the card details to boot.

Credit cards are like any other financial obligation; a liability. Careful card holders realise this and use them wisely.