Financial Education: The Pros and Cons to Using Credit

Credit is as American as apple pie. It represents an agreement you’re probably familiar with, in which you agree to pay someday for money you’re using now. But biting off too much can weigh you down.

Most adults have used credit instead of cash in the form of a credit card, a line of credit from a bank, or something else. Once the money is paid back – usually with interest – it becomes available again. This cycle of lending and borrowing has helped countless people achieve their dreams. Many of us wouldn’t have a home, a business, a car, or even a phone without it.

Whether you should rely on credit for everyday purchases is another question.

Bank Credit

There are lots of ways to build credit through different services at banks and other financial institutions. The benefits are clear: If you need money on an ongoing basis, a personal line of credit or a credit card is an option, and it comes with a price.

Credit history. One major benefit of credit is that, over time, it provides you with a form of financial buying power. Like it or not, we’re all being scored on our credit history. A decent credit score in the future means you’ll be able to qualify for better interest rates and lower finance charges. Because it shows you’re good for your word, it can translate to paying a smaller deposit for anything from a phone to an apartment.

Potential downsides. Any time something is loaned to you on credit, it’s important to remember that there are fees involved. Assuming you’ll be able to pay off debts can even be dangerous. Usually, the amount you owe only grows bigger the longer it takes to pay it back. A poor credit history will just make it harder to get loans, let alone pay off your debts, and that’s what you want to avoid.

Opting out. Some people opt out of the credit cycle by using other financial services that don’t involve accruing debt, due to a lack of funds or for practical reasons. By resisting the lure of loaned money, you might be avoiding a serious financial pitfall.

Credit Cards

Millions of Americans benefit from the convenience of credit cards. Because there’s a payment delay, they can be a necessary way of covering education or medical expenses – in other words, investments in our future.

Credit cards have three basic purposes:

1. Convenience. You don’t need to carry cash.
2. Access. You can buy things before you have the money to pay for them.
3. Credit history. You’re building a credit history that can help you get loans later on.

But the truth is that many people struggle to afford them. Almost half of Americans are carrying debt that they might not be able to pay off. If you’re on the fence about whether to open an account, make sure you understand the three biggest downsides:

1. Self-control issues. If you don’t control your spending, it becomes a cycle that causes emotional stress and even more money problems later on.
2. Compounded interest. Most credit cards charge late fees and compounded interest. That means a percent of what you owe gets added to your unpaid balance, so that you also pay interest on your interest. It’s like a punishment for over-spending.
3. Worst case scenario. With too much unpaid debt, your card can be frozen. A debt collector could sue you or have your wages garnished.

You also want to avoid making poor choices that could lower your credit score and cause a future loan request to be denied.

Credit Card Cash Advance

If you’re a responsible credit card owner, there’s another perk to having one. Sometimes you need quick cash – say, for an emergency or other expense that won’t wait. A credit card cash advance is a way you can use your credit card to turn your credit into cash. Think of it as like a mini-loan. You’ll still have to pay that money back, and it’s not completely free. Make sure you understand the fees or other costs a cash advance could incur.

With any form of credit borrowing, the two questions you need to ask yourself are: Can you pay it back with interest? And, do you have the self-control? If the answer is no to either one of those questions, you may be better off sticking with traditional spending methods, at least for now. Why make a promise you can’t keep?

If you’re curious about getting quick cash through your credit card, call your nearest Currency Exchange location or stop on by to get more details on our Credit Card Cash Advance program. Whether or not credit is for you, our employees are experts in an array of financial products that can help you access your money quickly and painlessly.