Are credit cards really that evil?

For many people, credit cards are the embodiment of evil. In the wrong hands they can lead to reckless spending, crippling debt, and eventual financial ruin. However, the “evil” tag is often unfairly applied to any tool that, when used responsibly, can be a positive for many people.

Credit cards are such a tool; whether they are used for good or evil is determined by the knowledge and responsibility of the user. For those living below their means, paying off balances monthly, and carrying few cards, credit cards are valuable and helpful. In the right hands credit cards can help to build credit, protect your money, secure discounts and benefits, and assist you in an emergency.  

Building Credit

A person’s credit score, a number between 300 and 850, indicates their trustworthiness to potential lenders. The score is determined by how consistently and reliably someone uses his or her credit. Six factors determine a person’s credit score:

  • % of on-time payments
  • Open card utilization
  • Negative marks (accounts in collection, bankruptcies)
  • Average age of open accounts
  • Total number of accounts
  • Total hard credit inquiries

Regularly using credit cards and paying off balances shows responsible use of credit and improves a person’s credit score. To build positive credit with a credit card follow these simple steps:

  • Monitor your credit score to ensure there are no mistakes on your credit report
  • Make payments on time
  • Keep available credit high
  • Keep balances low

Protecting Your Money

Credit cards create a barrier between merchants and your money. They provide fraud protection and allow you to dispute charges without placing your cash in limbo. Some debit cards provide limited fraud protection, but you can bid your cash adieu in the case of fraud. With credit cards, you are not held responsible for charges made by someone other than you and your accounts can be quickly and conveniently frozen in the event of lost or stolen cards.

Securing Discounts and Benefits

Many credit cards offer rewards to encourage usage. This can lead to unnecessary spending for reckless users, but can also be a boon to those with more responsible fiscal habits. Credit cards can provide everything from airline miles and discounts on large purchases like vehicles to cash back on everyday purchases like groceries and gas. Many large retailers also offer their own credit cards that provide discounts on purchases.

Emergency Assistance

Ideally, everyone would have six to twelve months of emergency funds available at all times. Unfortunately, that is not the case for everyone and emergencies happen. Credit cards can provide a safety net when emergency funds are needed. In anticipation of unforeseen emergency events, always keep your balances low and available credit high so you can utilize that credit when it’s most necessary.

Nice newsletter. Good article. Good information. Thank you. Carol

For conventional financing, borrowers with scores at 740 or anywhere above generally receive the same loan pricing (rate and cost). That being said, the better your credit the higher your chances of receiving loan approval with high debt to income (up to 50%) or high loan to value (up to 95%) which can be a major benefit when applying for a new loan. For Jumbo financing, borrowers with credit scores above 800 are generally rewarded with both better pricing and easier guidelines. There are no situations where better credit is a negative when obtaining new financing so we should all continue to strive to reach and then stay in the 800’s.

What are the advantages of a score over 800

Thank you Mike for this information. As a residential realtor the information that you provide is crucial to a successful transaction for my clients. You are indeed a pleasure to recommend to all of my clients. You are so professional, thorough, conscientious and pleasant to work with. !!

Hi Dane! Wanted to make sure I'm clear on this. Am I right in saying that on whichever remodel is done you still take a loss rather than an increase in value - the ROI will never exceed 100% of cost?