What are the pros and cons of credit cards?

When used responsibly, credit cards can offer several potential benefits:

A convenient payment option

Credit cards offer a convenient payment method, eliminating the need to carry substantial amounts of cash that can be both inconvenient and susceptible to theft. Moreover, credit cards provide a solution for situations where you may not have immediate access to liquid funds or prefer not to deplete your savings in one go. 

With a credit card, you have the flexibility to make significant purchases and then repay the amount over time through smaller monthly instalments. Some credit cards even provide the option of interest-free or low-interest instalment plans for a specified period, making it possible for cardholders to plan and budget for larger expenses without straining their household budget. However, remember that you could be hit by late payment fees or high-interest charges if you miss a repayment or fail to stick to the repayment schedule.

Get rewarded for your spending 

Some credit cards offer rewards programs that enable you to accumulate cash back, points, or miles for purchases made on the card. In addition to rewards, some credit cards offer extra perks, such as airport lounge access, complimentary travel insurance, rental car excess insurance, and even price protection insurance, which may refund you the price difference if an item you bought with your card decreases in price. 

However, rewards-based credit cards typically charge higher annual fees and interest rates compared to standard credit cards. Some of these cards may also have minimum spending requirements to unlock some offered benefits. It's essential to consider your spending habits and lifestyle before choosing a rewards-based card to ensure you don't end up paying too much for benefits you might not need.

Build your credit history

Using a credit card responsibly and demonstrating disciplined repayment habits can help you establish a positive credit history. Paying off your credit card balance in full each month enables you to avoid debt and shows potential lenders that you are a reliable borrower. Responsible credit card usage can also help improve your credit score over time, making it easier to qualify for other credit products, like a home loan or a personal loan.  

Could be helpful in a financial emergency

Your credit card could provide you with immediate funds in a financial emergency, be it for a medical bill, car repair, or an unforeseen household expense. 

Some credit cards also offer interest-free days, meaning you have a grace period of a few days to settle your balance after receiving your credit card bill. However, you lose the benefit of interest-free days if you don't pay off your balance in full, and you'll be charged interest on the unpaid amount.

Special balance transfer rates

A balance transfer credit card allows you to transfer your existing balance to a new card that typically offers a 0% interest rate for an introductory period. You can use the interest-free period to repay your debt faster without being charged any interest. 

However, it's important to note that the interest rate typically reverts to a higher ongoing rate once the introductory period is over. If you're unable to settle the balance within the interest-free timeframe, interest charges will commence, potentially worsening your situation.

A credit card could be a helpful payment tool when used responsibly, but it also comes with several potential risks.

The temptation to overspend

Credit cards make it really simple to spend money that you don't have. This could be particularly tempting for individuals who find it challenging to manage their spending habits or struggle with impulse control. 

If you think having a credit card could tempt you into spending beyond your means, you may consider the option of a prepaid card that only allows you to spend the amount loaded onto the card. 

Another potential solution could be applying for a credit card with a lower credit limit, preferably an amount you can comfortably afford to repay in full each month. 

The potential to kick off a debt cycle

When using a credit card, it's important to pay off your credit card bill regularly and try to clear the balance within each statement period. Failing to do so can potentially lead you into a cycle of debt that becomes increasingly difficult to escape over time. 

Most credit cards offer an interest-free period, allowing you to avoid interest charges if you clear your balance in full. However, if you're unable to pay off your entire monthly balance, the carried amount starts accumulating interest. Interest rates as high as 20% or more can apply to the carried forward balance each month, compounding your debt over time. If you only make the minimum payment due on the card and continue spending, you may be burdened with a progressively increasing debt that might become too heavy for your budget to handle in future.

Various fees that could add to your expenses

Credit cards often come with a range of fees that can increase the overall cost of using the card. These fees may include: 

• Annual fees 

• Foreign transaction fees (charged for purchases made in a foreign currency)

• Cash advance fees (for withdrawing cash from the credit card)

• Reward program fees

• Late fees (for missed or late payments) 

When considering which credit card is right for you, it's important to carefully compare and evaluate the different types of fees associated with different cards to make sure the potential benefits of using the card are not outweighed by the costs involved.

A credit card could be quite convenient and useful in the right circumstances. In that case, could having more than one credit card be better for extra comfort and convenience? 

While there may be some benefits to having multiple credit cards, there are also several potential drawbacks to consider before applying for extra cards.

More bonus offers

One advantage of having multiple credit cards is the ability to access more bonus offers. Some lenders offer special introductory offers and incentives to new credit card customers, such as discounted interest rates, bonus reward points, and other free gifts. By applying for additional cards, you could take advantage of these offers and potentially enjoy extra benefits.

Reward points

Another benefit is the potential to earn more reward points. By matching credit card reward programs with your spending, it may be possible to build up more reward points than you typically would with a single credit card. 

For example, if one card earns the most points when paying for travel, while another earns more points from supermarket shopping, splitting your spending between these cards could allow you to reap more rewards in total. 

Budgeting

Multiple credit cards could also help you in budgeting by allowing you to separate different types of spending, such as spending for work, home, and travel, by putting each onto a separate card. Having a spare credit card can also serve as a backup in case of emergencies.

Accrue debt easier

While being able to borrow more money may seem like more of a pro than a con at first, this could leave you unable to easily afford your credit card repayments, making escaping your debt much more difficult. If you were to max out multiple credit cards, you could potentially end up in far more debt than you would with a single credit card.

Fees and charges

Another drawback is the accumulation of fees and interest charges. Many credit cards charge annual fees, especially those offering rewards programs. Having multiple sets of these cards can mean being slammed with several fees each year for bonuses and rewards that you may not always get to enjoy. 

Payment timing

With multiple cards, you also need to be careful about making timely payments on each of the cards or you might be hit with late payment fees and high interest charges. Missed credit card repayments could also affect your credit score negatively. 

Borrow less

Lastly, having multiple credit cards could make it harder to obtain other types of loans, such as a car loan, personal loan or home loan. Because a credit card effectively serves as a flexible line of credit, some lenders will assess your loan applications on the assumption that tomorrow you might go out and max out your card debt. 

If you have multiple credit cards, you could potentially borrow much more money, and get into much more debt trouble, meaning some lenders may be more likely to reject your loan application.

If you already have a credit card and intend to get more, carefully consider these pros and cons to determine whether multiple credit cards are useful. Take into account your spending habits and financial circumstances to ascertain the amount you can comfortably repay each month. Consider keeping the combined credit limit of all your cards aligned with this figure.