As a Canadian, you’re no stranger to the term “credit card debt.” Right now, the average Canadian has a credit card balance of over $3,000.

The good news is that credit card debt in general is going down. In fact, the average Canadian credit card debt hasn’t been this low since 2015!

This puts into question the myth that credit cards are inherently evil—an inescapable black hole of debt. The reality is, credit cards offer a lot of financially advantageous perks to those who use them wisely.

Today, we want to set the record straight about the pros and cons of credit cards. In the following guide, we teach you everything that you should know about credit cards, the good along with the bad. To learn more, read on.

 

Pros of Credit Cards

First, let’s take a look at the pros. Here are the positive aspects of using a credit card.

1. Build Credit

Credit cards can be a very good way to build credit. You see, if you never borrow at all, you have zero credit history, equalling a zero credit score.

But if you start borrowing with your credit card, you begin to build up your credit history. As long as you pay off your credit card balance quickly enough/without missing any payments, your credit rating goes up.

2. Low Introductory APR

One of the most notorious disadvantages of credit cards is their high interest rates. This makes them not a good option for transferring/consolidating other debts.

However, many cards offer a low introductory rate when you first sign up. For instance, it’s common to receive offers for 0 APR on purchases and balance transfers for 18 months. In this case, it can be a huge help to transfer a high-interest balance and then pay it off over 18 months.

3. Earn Rewards

A lot of credit cards offer a unique chance to earn bonus cash back on your purchases. A common example is earning 1% back on all your purchases. So, after spending $1,000 on your credit card, you would earn $10 back.

You could then use the money you earn to pay down your balance. Of all the payment options you have available to you, most of them do not come with this perk.

The best part happens when you make a purchase and then pay it off immediately. Then, you earn the rewards but you don’t accrue any interest.

4. Emergency Funds

What do you do when the transmission in your car suddenly fails? Or, what if you must unexpectedly attend a funeral 1,000 miles away?

These are big expenses that you weren’t planning for. In these situations, you can fall back on your credit card’s available balance to cover it.

Now, hopefully, you’re the type of person who plans ahead and already has an emergency fund saved up. Still, it’s nice to have another option. After all, it’s possible that you’ll have a lot of sudden expenses all at once and that your emergency savings won’t be enough to cover it.

5. It’s Good to Have the Option

As we mentioned earlier, you have a lot of payment options at your disposal. Still, since credit cards offer so many unique benefits, it’s good to have them around as an option.

As you can see, there are many situations in which paying with a credit card is the best choice. Besides, having an available balance that you’re not using improves your debt utilization ratio, which raises your credit score.

6. Take Time to Pay

Do you need to make a large purchase but you don’t have the funds right now? Putting the purchase on a credit card gives you time to pay while building up your credit at the same time.

For example, you might have some urgent home repairs that need to be taken care of right away. You can pay with a credit card and then pay the balance off over the next 3-6 months.

Also, when you use credit cards this way, the high interest rates are not much of a problem. Since you’re paying the balance all the way down in a short amount of time, you won’t pay very much interest.

7. Safer Than Cash

Let’s say you get home from shopping and notice that your cash is suddenly missing. How can you get it back?

Typically, you can’t. Most of the time, if your cash is lost or stolen, you’ll never see it again.

Even if the thief is caught, it’s near impossible to prove that it’s the same person who stole your money. Nor can you prove how much was stolen.

On the other hand, what do you do when your credit card is stolen? You call the credit card company, report the theft, and report any fraudulent purchases. Since credit cards are insured, all fraudulent purchase amounts will be returned to you promptly.

 

Cons of Credit Cards

As you’re probably aware, credit cards can spell certain doom for your finances if you’re not careful. Here are the dangers to watch out for when using credit cards.

1. High Interest

Yes, we all know the most infamous problem with credit cards: high interest rates. For instance, credit cards have interest rates that are three times higher than those of most personal loans.

Here’s why this is such a problem. If you rack up more on your credit card than you can easily/quickly pay off, the debt sits there, earning lots of interest each month. Before you know it, your monthly credit card bill costs you several hundred dollars.

Worst of all, the minimum payment covers little more than the monthly interest earned. So, if you only make the minimum payment, most of your debt remains after your payment is made. In other words, you’re paying hundreds of dollars every month while getting no closer to paying off your debt.

2. Easily Rack Up Debt

Believe it or not, the situation we just described can easily get even worse. That is, you could keep putting more purchases on your cards. Then, you’re even further from paying off your debt and your monthly payment gets higher still.

Truly, this is the biggest problem with credit cards. It’s why they exist in the first place—the very reason that credit card companies remain in business.

The fact is, credit cards are designed to make it extremely easy to pay for things. If you’re not careful, you can max out all of your credit cards in a day.

Unfortunately, they’re nowhere near as easy to pay off. That’s why so many people end up stuck in crippling credit card debt for years.

3. The Drawbacks May Cancel the Financial Benefits

Always remember that all of the advantages of using credit cards can actually be a double edged sword. For example, it sounds great to transfer your high-interest credit card balance to a credit card with a low introductory rate.

However, that leaves you with a large amount of available credit on the card that was just paid off. You could easily fill it back up again. Then, you have twice as much debt as you had in the first place.

Likewise, you could receive a limited-time offer to earn bonus rewards points. You don’t want to miss the opportunity, so you make lots of purchases with your credit card to qualify.

But then, it takes you a long time to pay off these purchases. In the end, you spend a lot more in purchases than you earn in rewards.

4. Easily Destroy Your Credit

It’s bad for your credit to have a lot of debt and very little available balance to borrow from. Plus, all of these negative situations we’re describing can lead to financial difficulty. As a result, you might end up unable to pay certain bills on time.

This, too, is terrible for your credit rating. And it results in late fees, which make your financial problems even more difficult.

5. You’re Stealing From Your Future Self

Lastly, there’s a reason why it’s so easy to pay with credit cards. It’s because having an available balance feels the same as having actual money. That is, if you have $3,000 left before you reach your credit card limit, it feels the same as $3,000 in your bank account.

But this isn’t the case at all. What you’re really doing is gambling on the present with your future bank account balance. When you pay with a credit card, you make the decision that the money you would have in the future will serve you better right now.

Hopefully you’re right. But if you’re not, your future self is going to pay the price for this decision.

 

Remember These Pros and Cons of Credit Cards

Never take credit cards lightly or you could end up under a mountain of debt. Contrarily, use them wisely and they could be the tool of your financial salvation.

Make sure you don’t forget what you learned here today about the pros and cons of credit cards. Oh, and please share this guide with your friends so that they may be enlightened, too.

Want some more indispensable financial advice? Then check out our Beginner’s Guide on How to Start Investing.