Credit cards serve a valuable purpose. You can’t pay cash for things all the time. Often, paying cash and wiping out your savings and checking accounts makes no sense at all. As long as the credit card company offers fair rates and you pay back everything on time, no problems should arise.
Unfortunately, millions of people find themselves in trouble with their credit card companies. Using a credit card requires discipline and knowledge. Otherwise, a charge account could get you into trouble. Think about the following ways credit cards might undermine your finances.
How Many Do You Have?
Temptation often sabotages discipline. When you take out too many credit cards, you might find yourself using them too often. Fiscal discipline could go out the proverbial window, and the balances on multiple cards could go way up. Then, your credit score will suffer because the balances are too high. High balances also put you in a mountain of debt. In worst-case scenarios, people find themselves struggling for years to get out from under what they owe.
Taking out too many credit cards hurts account holders in more ways than they realize. Applying for too many credit cards can also work against your score. Each time you fill out and submit a loan application, a slightly negative mark goes against your overall rating, and those marks add up to drive the score down. Easy access to borrowing makes it too easy to overspend and go into debt. If you want to limit your troubles, limit the number of credit cards you have.
Credit card companies are for-profit enterprises. The way they make their money involves advancing cash for an agreed-upon interest amount. Not all interest rates are low or reasonable. Clients may gravitate toward a particular credit card due to reward points. A business owner may find trading points for purchases a good deal. It can be if the benefits aren’t overtaken by high interest rates.
Signing up for cards with excessive interest rates remains a common trap for consumers and business owners. With businesses, things become even more complicated. Interest on unpaid balances becomes a long-term problem that cuts into revenue. Current Expected Credit Losses, or CECL, is the new model for credit loss accounting, but under CECL they still look at losses long-term. Even if you have a handle on it for now, will that continue? Interest and other fees can set a course for cash-flow doom, so beware.
Credit Cards Undermine Budgeting
Effective budgeting could help private households and commercial businesses stay on a positive fiscal course. Examining income and cash flow in relation to expenditures supports staying on the right path. When too much cash flow comes from borrowing, budgeting plans can go haywire. Eventually, the time to settle the debt comes due. Unfortunately, settling the debt may prove impossible if it’s excessive. If it’s too high, you’ll never get your budget or fiscal house in order.
There are some basic rules to charging things on a credit card. For instance, using credit cards makes sense at certain times, but you need to handle them smartly. Having too many cards or signing up for cards with high interest rates can cause you a lot of financial grief.
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