Credit cards have received a lot of critiques, namely because they come with a lot of hidden risks that need to be avoided. Although it might seem easy to avoid the perils of credit card debt, the reality is that it can be quite difficult.
The whole issue with credit cards is that the companies behind it profit from your financial mistakes. As a result, these companies come up with various means to land you in a sea of debt.
Below are 10 reasons why credit cards are hazardous to your financial well-being, and why you should avoid them.
Cutting your credit score
Your credit score doesn’t just determine the interest rate of your mortgage loan. If you have poor credit scores, you are deemed more likely to commit fraud, to be overdue on your rent and if you will be a good employee. As such, a poor credit score can cause you to pay higher insurance premiums, make it more difficult for you to find housing and affect the kind of jobs you get. If you start to fall into growing credit card debt, your lowered credit score will cause you to pay much higher than those who have good credit ratings.
They have a universal default
Universal default dictates that any financial mistakes that are reflected in your card history give the company the right to inflate your interest rate to the highest possible amount. This may seem absurd, but it is the truth. Regardless of whether the mistake has anything to do with your credit card, an overdue payment on rent gives the company the consent to bump the rate to as high as above 30%.
Sky-high interest rates
When it comes to interest rates, quote a double-digit return of 15% on an annual basis, and most investors would be quick to grab hold of this opportunity. If you think this rate is high, be prepared for a surprise when you find out that credit card companies can charge interest rates at more than twice of 15%. In this case, you are the one who gets charged the interest on top of your borrowed sum, which can be seriously damaging to your finances. Interest is a blessing when you are saving, but it can quickly become the enemy when you’re the one who has to pay for it.
As though the profits from interest charges aren’t high enough, credit card companies make almost as much on the fees they charge their customers. Overdue payments get charged with costly late fees, exceeding the card limit gets charged with more fees, and if you want to apply for special rewards, you are charged with yet another annual fee. Additionally, transferring card balances are chargeable with a transfer fee, and usage of credit cards outside of your home country is chargeable with a foreign-exchange fee. Failing to exercise caution with credit card usage, often leaves you prone to endless fee charges that can even exceed that of interest.
Hidden terms and conditions
Ever noticed that the terms of the credit card are often printed so small, you don’t feel like reading it? But once you do (and you should note that doing so is necessary for your interests) you’ll be surprised to find out that a lot of the terms are for the benefit of the company. Take cards that have “fixed” interest rates, for instance. The terms of the cards will tell you that the rate only stays fixed until anytime the company decides that it should increase, during which they will give you several weeks’ notice about it. Another example to note is that customers forfeit their rights to take any disagreements with the company to court.
Deceptively small initial payments
Credit card bills will only charge you with a minimum payment at the start, making you believe that your overspending isn’t that serious. But what we are often unaware of is that these initial bills are low in order to stretch the loan life for as long as possible, generating more interest in the long term. It is important to note that minimum payments are usually a mere 2%-4% of what you actually owe.
They persuade you to spend on impulse and increase your expenditure
Since credit cards allow cashless transactions to be made, nothing can stop you from making an impulse purchase when you don’t have cash but a credit card on hand. With several such purchases, debt will soon follow. Additionally, studies have shown that those who shop with credit cards tend to spend more than those with cash. Of course, none of this will benefit you, only the store and the credit card company.
They encourage you to spend more than you can afford
Credit card companies make it a point to persuade you into spending more than you can afford, as this leaves you with no choice but to borrow from the company at their exorbitant interest rates. Furthermore, the company also encourages you to spend heavily on gifts, holidays and any other luxury you could possibly want. Not to mention, the imposed limit makes you prone to debt. Everything that it markets is designed to get you to splurge, and unless you can resist its temptations, the company will often get what it wants.
Fraudulent baiting and switching
Here’s an example of fraudulent bait and switch: One applies for a credit card with a fixed interest of 0%, but unbeknownst to them, the card they receive is a different one with a higher interest rate. For some companies, their terms state that in applying for a credit card, the customer gives consent to taking any card the company dispatches to you, even if it is different from the one being advertised.
Using a credit card is ridden with multiple financial pitfalls, so it is very important that you are familiar with how to avoid the potential damages before applying for one. You know yourself best: if you foresee yourself failing to use credit cards wisely, just don’t opt for one. Financial well-being always takes priority. More so, many people incur huge credit card debt when they are not careful about tracking their finances which may result in them having a bad credit rating or no credit rating at all. However, if you happen to be one of them that have a bad credit or no credit, don’t be too worried as there are many reputable providers out there that can help you in getting a bad credit car loan and to achieve your dream car goals.