Flipping through the mail you find another invitation to apply for a credit card with an incentive printed brightly on the front of the envelope: 50,000 points with first purchase, earn a $50 gift card at XYZ (insert your favorite store here), etc. It s mighty tempting to fill out that application. Especially when all the other mail is bills, maybe even one you forgot about that puts going shopping this weekend out of the budget.
So, how do you decide whether or not to open that envelope and fill out the application. The credit card is a useful and dangerous little tool. Keep reading for some pros, cons, and alternatives to credit card use.
Credit cards can give us many appealing options.
A line of cash at your fingertips when an emergency arises:
When your car quits on the side of the road, your toddler spills juice on your laptop, or you re injured, having a line of credit to fall back on can feel like a life saver. Perhaps you re more comfortable going through life with that little ace in your back pocket. When you re out buying a replacement laptop at the last minute, you might even hear yourself thinking, Paying the interest on this is so worth it.
But how do you define emergency? Does the definition ever get a little gray? Perhaps you re out shopping with a friend and see a new pair of shoes that you really like and SCORE they re on sale! But you hadn t budgeted for them just yet you were planning on buying new shoes next month. Does the credit card slip out of your wallet? It s not a big deal if it just slips once, but one purchase can lead to others and land you waiting for AAA wondering how you re going to pay them.
An alternative? Instead of planning to use a credit card for emergencies, set aside a special savings account for the unexpected. Set aside a number that s comfy for you and similar to the amount of cash available on a credit card you re thinking of getting or already have. Once you ve created your emergency fund (whether you can do it right away or it takes a few months to save up enough), then ditch that emergency credit card and all its risks. Just make sure your emergency fund is easy for you to access.
Rewards programs:
Earning airline miles, hotel points, gift cards, and more sounds appealing when you apply for a credit card. Some people take advantage of these rewards well enough that they really do benefit from their credit card. If you pay off your entire bill every month and don t accrue interest on the account, you can earn yourself free flights and gift cards to help you jump start your Christmas shopping. It s a great deal. If you use it wisely and spend enough to earn the points. But if you spend more than you can pay off, then you risk spending more in interest than you ll earn in rewards. And that s just no fun.
Alternative? Get your rewards elsewhere. See if your debit card has a rewards program and use it! Pick one store where you do your grocery shopping and sign up for their rewards card. Do the same with your pharmacy, gas station, or any place you regularly shop that offers a free rewards programs. Look for ways to earn rewards for things you do anyway other than spend money. For example, sign up with SwagBucks and use their search engine you can win points when you search that you can then redeem rewards.
Build your credit:
If you re young and have little or nothing to go into a credit report it can be tough to get even a small loan for a new couch or to rent an apartment without a co-signer. A credit card can be a great, quick way to build up your credit and make it easy for you to get bigger loans in the future, say, when you want to buy a house. But it s only good if keep up with the payments. It s easy to overspend and fall behind, which can send you quickly from having no credit to having bad credit (which is worse than none).
Alternative? Don t be afraid of asking someone to co-sign with you on an apartment lease or for a car loan when you re ready to take those steps. You ll build your credit over the course of the lease or loan without the risks of overspending and sending your credit score into disarray. You can also help your credit score (at least as its reported through some agencies) by paying all your bills on time. If you want to get something similar to a credit card, consider a charge card they work the same way but with a charge card you re required to pay the bill in full each month.
