What are the disadvantages of credit cards?
credit cards can be very good as they aid our financial wellbeing but they can also have significant disadvantages which may make them not suitable for everybody
Below are some of the disadvantages of credit cards:
Borrowing too much
credit cards may encourage people to get into more debt than they may be able to afford. This is a significant disadvantage of credit cards. When people run into financial difficulty they may be encouraged to borrow from their credit cards and in some cases, they may have more than one credit card and borrow on all of them over a few months. This could lead them into a debt spiral if they are unable to repay the debts as quickly as possible.
Credit card interest is charged based on compound interest. This means that interest is changed on whatever balance is outstanding plus any interest charges that were added to the account in the prior statement cycle. This is a big disadvantage of credit cards as compound interest can grow much faster than standard interest . This means you can find yourself in debt much faster than you might ordinarily anticipate. This is a disadvantage of credit cards and credit cardholders should be more aware of the effects of compound interest.
Damage to your credit score & history
credit cards can boost your credit score but they can also significantly reduce your credit score and damage your credit history if you miss your monthly repayments or use more than the ideal creditutilization percentile of 30%. Most people may not be aware of this and use their credit cards as they please and in some cases using the total credit limit available on their credit cards. The fact that credit cards can damage your credit score unknowingly is a significant disadvantage of credit cards.
High fees and charges
credit cards have high fees for and charges for going over your credit limit, withdrawing cash or transferring cash out of the credit card. These charges mean credit cards are not a flexible lending product and are disadvantages of credit cards in comparison to debit cards. But of course, debit cards do not provide a lending facility with the except you have an overdraft facility on your bank account.
Hard to understand
Another huge disadvantage of credit cards is that they can be hard to understand.
Some people with credit cards still don’t understand what all the terminology around credit cards mean or how credit cards even work. This is a huge disadvantage of credit cards and in many cases can make them counterproductive to our financial wellbeing. In many cases, people sign up to credit cards with introductory offers and done realise when these offer end or when they begin to be charged interest.
credit cards typically have higher APRs and fees than most comparable lending products and this is a huge disadvantage of credit cards as they can be very expensive to maintain with high annual fees or high aprs which can cost you significantly more if you carry a credit card balance from month to month.
High risk of fraud
Credit card fraud is also very common with credit cards and although you should be able to get your money back from the credit card issuer, the fact that credit cards are prime targets of card fraud is a disadvantage of credit cards.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.