Have you ever exceeded your annual credit limit? Has your interest rate significantly risen? Do you ever feel that your budget is going to explode due to unnecessary spending? Well, you might be facing various dangers of credit cards. Although credit cards have made purchasing very easy, they have made it very hard to manage a personal budget. You go to a mall, love a jewellery box, take out your credit card and buy it on spot. Regardless of whether you have any amount in cash or not, your transaction will be processed. Although the use of credit cards does provide ease in buying, it has also affected financial system in a negative way. Some of the most common dangers of using credit cards include:
1. Overconsumption and Compulsive Buying
This is perhaps the most common danger of using credit cards. It has become so easy to make a purchase on spot that a lot of people overspend. You end up spending for things you will never need. Other than this, it becomes very difficult to manage the track of your purchases when payment is made through credit cards. This is especially a danger for first-time or young users of credit cards. Often times, teens and young adults end up spending much more than they need to. They also make heavy demands on their parents which affect their finances adversely.
2. High Interest Rates
This is another huge reason credit cards can ruin your finances. For every purchase you make, the interest rate applied on it will depend on your credit score, frequency and other factors. In most of the cases, interest rates are very high and borrowers get stuck in a vicious cycle of paying and spending money. Rather than using your money on buying other items in cash, you will be using that amount to manage your interest expenses on your credit purchases. When calculated in total, this will result in an annual loss of 15-20% from your total budget.
3. Poor Effect on Credit Scores
The habit of compulsive buying combined with high interest rates make it very difficult to manage your finances effectively. Credit cards are popular for their adverse effects on credit score and ratings. They can substantially worsen your credit history. In turn, it will become harder for you to get your loans approved. This will increase your need to increase your credit card expenditure and will drag you in a vicious circle of debt and poor credit history.
This is especially true for people with multiple credit cards. If you are an owner of more than two credit cards, managing finances will be even tougher. It will be more difficult for you to maintain track of your all purchases and not engage in overspending.
4. Managing Your Budget Becomes Difficult
All these factors combined can affect your budget in a negative manner. Credit cards make simple transactions much more complicated and complex. They also add unnecessary expenses and charges to your transactions. If you get stuck in debt, you will be charged with additional debts, penalties and late fees. Managing a budget becomes very hard with one or more credit cards.