If you're just starting out, your first exposure to the world of credit is likely to be through attaining a credit card, perhaps even before graduating from college. Used wisely, credit cards can be a valuable financial tool. However, credit card abuse can mean that your cards will live up to their derogatory nickname of "drastic plastic."
You've probably been in a situation where you don't have quite enough money to make it to the next paycheck at one time or another. Credit cards can prove to be a valuable asset by providing the funds you need to carry you to payday. If you pay the balance in full when the monthly statement arrives, you can avoid having to pay any finance charges. Using your credit card in this manner is much like taking out a short-term interest-free loan.
Building Credit History
Responsible credit card use is an excellent way to establish a credit history, which can help you when it comes time to make a major purchase. When you buy a home or car, prospective lenders will closely scrutinize your credit score and payment history. The higher your score and the greater your demonstrated ability to make payments on time, the better your chance of gaining loan approval at a lower interest rate. This could save you hundreds or even thousands of dollars in interest payments over the course of the loan.
On the other hand, credit card abuse can lead to serious financial trouble. If you're the type who likes to shop until you drop, the ease of use credit cards offer can cause you to pile up the charges on your card. The mounting interest and finance charges will place you deeper in debt with each passing month if you can't pay the balance in full. Before you know it, trying to make even the minimum balance due may become a burden that you find difficult to bear.
Too Much Credit
The relative ease of obtaining credit cards can quickly lead to having too much available credit. While credit cards are great for helping you establish credit, carrying too many credit cards can make lenders view you as a possible credit risk, even if you manage them effectively. Too much credit may also have a negative impact on your credit score and make you more susceptible to the risk of credit fraud.
Chris Joseph writes for websites and online publications, covering business and technology. He holds a Bachelor of Science in marketing from York College of Pennsylvania.