Before we start looking into the dangers of using credit cards, let’s define what credit cards are and why they are used. In a nutshell, the term “credit” refers to something of value that is borrowed by someone who is expected to return it in the future. In the case of credit cards, “credit” is borrowed money. The ability to obtain credit can be very beneficial. For instance, it prevents us from carrying around large amounts of money in order to make big payments, and allows us to make a payment in smaller instalments. However, it’s important not to get caught up in the upsides of having a credit card and educate yourself with the dangers of credit cards, which are as follows:

1. You become stuck in a psychological trap of believing that the credit is your money.

Unfortunately, it’s very easy for us to use our credit cards as if it is our own money, but that is never the case. A credit limit of $1,000 does not mean we’re free to spend $1,000 at our own leisure.

Solution: Restrict yourself to mainly using your debit card and cash for majority of your spending.

2. You carry too many credit cards.

Applying for too many credit cards does not look good in the eyes of the credit bureau and lenders. The more credit cards you have, the greater your ability is to spend beyond your means. As stated in Top Credit Cards for Students, having 2-3 credit cards would be ideal.

Solution: Start your credit journey by focusing on how to manage one card for a long period of time until you feel confident enough to handle more credit.

3. You lose the ability to save as you try to catch up with credit card debt.

While credit cards are great for making big purchases in smaller instalments, they can definitely strain your budget if you don’t keep up with all your payments. Soon enough, you’ll find yourself stuck in debt

Solution: Create a budget to avoid overspending and schedule preauthorized payments to avoid credit card debt.

4. You take cash advances.

Simply put, cash advance is the process of going to an ATM or bank to withdraw cash out of your credit card rather than your debit card. This is a much more expensive method of getting cash because it comes with interest rates that are much higher than your regular credit card rate.

Solution: Never take cash advances at all. If you’re in dire need of cash, look into other methods, such as using a Personal Line of Credit, which typically have lower interest rates.

5. You may be at risk of being a victim of credit card fraud.

One of the most common types of credit card fraud is the unauthorized use of credit card information that may lead to successful fraudulent activities online, over the phone, or by mail.

Solution: Constantly review your credit card transactions and thoroughly read your statement to ensure that no payments are being made on behalf of you.

Conclusion

At the end of the day, credit cards are a convenient but delicate tool to have. The most important thing is to remember not to treat your credit limit as if it is your own money and to set an accurate, achievable budget that will keep you on top of your finances.

Writer: Mariam Walaa

Disclaimer: All investing can potentially be risky. Investing or borrowing can lead into financial losses. All content on Bay Street Blog are solely for educational purposes. All other information are obtained from credible and authoritative references. Bay Street Blog is not responsible for any financial losses from the information provided. When investing or borrowing, always consult with an industry professional.