Dangers of Credit Cards


Although there are many benefits associated with credit cards, there are also dangers, some hidden that can cause people serious problems. The truth is that when used appropriately, cards are a valuable tool but if abused, or if cardholders are unaware of certain things, a series of issues could result.

The most important thing a person needs to understand, especially when trying to improve a credit score is to learn about potential dangers of credit cards. After all, a large portion of credit report scores are based on revolving credit so when people fall behind on payments, overextend limits, or carry too many cards there would be a negative reflection.

? Grace Period ? Another important aspect of credit cards that individuals need to understand has to do with the grace period, which is the amount of time a person has to make the monthly payment within a billing cycle without the payment being considered late. Typically, credit cards have a 30-day grace period. As long as the payment is made and the account kept current, the cardholder has no problem. However, many credit card companies are now shortening the grace period down to 10 to 15 days. This means the risk of a person getting a payment in late increases. Again, every payment that comes in late is reported and shown as a negative entry on that person?s credit report.

? Penalties for Default ? When a revolving account is opened, defaults are established to include the type of card, the limit, payment terms, interest rate and so on. However, when a person does not adhere to these defaults on credit cards, such as missing a payment, charging more than the limit allows, etc, what happens is that the card company sees this as bad, which results not only are interest rates increased but also negative reporting to the reporting bureau.

? Over Limit Fees ? When a person ends up charging more to credit cards than what the limit allows, the card company is going to charge an over limit fee. Obviously, card companies will not let a person go too far over limit but if someone had a $500 limit and purchased something for $525, the purchase would likely go through. However, the individual could expect to be charged anywhere from $10 to $30 for the additional $25. While credit cards charged an over limit fee would not have a negative impact on a person?s credit report, if not careful, a person could end up spending hundreds of dollars in fees, thus wasting money.

? Fees for Late Payments ? Anytime payments on credit cards are late, even one day beyond the grace period, the card company has the right to increase the interest rate and charge the cardholder a late fee. Again, not only are people charged for making payments late but they also end up with a bad report on the credit history.

? Arbitration ? When people take out credit cards, they need to read all the fine print in the terms and conditions. One thing in particular would be the mandatory arbitration clause. If the contract states issues are handled through mandatory arbitration, the problem is that card companies have more free rein to behave badly without being sued. Therefore, while many credit cards have a mandatory arbitration clause, potential risks need to be considered.

In addition to possible dangers associated with credit cards, individuals should also know that there are times when credit cards can be beneficial specific to the credit report. If someone handles balances and payments appropriately, then additional fees, higher interest rates, and other penalties would be alleviated. This means the credit card company would report only positive feedback to the three reporting bureaus, which is exactly what people want.

One of the goals with credit cards is to use them responsively. When a person does this, the results are tremendously good. However, when someone abuses credit cards or simply forgets a payment accidentally, the consequences can come back and haunt the person. One of the best ways to use cards for improving credit is to pay off high interest cards and use only those with low interest.

Additionally, credit cards can be good for credit by making two to four smaller purchases each month and paying the balance off when due. This builds good credit by showing creditors that the person is responsible and aware of financial responsibility. For instance, a person could simply use a card for grocery buying and then within two weeks, pay everything do. The result is a positive report and improved credit.

Obviously, just as credit cards can be dangerous, they can also be highly beneficial. It all boils down to the cardholder paying attention to details and following the requirements set by the card company. With that, the person has great credit and strong buying power, while not running the risk of facing serious and potentially expensive challenges.