Credit cards can feel like a gift from the gods, letting you make purchases and earn rewards without needing cash on hand. However, they can also pose significant risks if not used carefully. Many people end up trapped in a cycle of debt, overwhelmed by high interest rates, and facing long-term financial difficulties.
Understanding the dangers of a credit card and how to avoid them is key for keeping your finances on track. Whether you're an expert user or just signed up for your first card, knowing the disadvantages of using a credit card will help you make informed decisions and avoid potential financial disasters.
“In a perfect world where everyone pays off their balances before interest accrues, there are no downsides to using a credit card,” says Gates Little, President and CEO of The Southern Bank Company in Gadsden, AL. “Unfortunately, your benefits are only as good as your use, and the minute you start carrying a balance, the interest racks up quickly.”
So, how can credit cards be dangerous? We’ve compiled a list of eight major risks that come with having and misusing a credit card. The good news: We’ve also gathered solutions and tips from financial experts on how to avoid the dangers of credit card debt.
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1. High-interest debt
If you're wondering, “Why are credit cards dangerous?” it's important to understand that banks make money from the interest they charge. Credit card companies often have high annual percentage rates (APRs), which means that if you don’t pay off your balance in full each month, your debt can quickly grow.
Even a small balance can snowball into a significant debt burden over time, especially if you only make the minimum payment. “The balance can accumulate a lot of interest,” says Loretta Kilday, DebtCC spokesperson, transactional attorney and financial expert. “This will lead to high-interest debt and cause long-term financial strain.”
How to avoid:
- Pay your balance in full each month: Avoid carrying a balance to prevent interest from accruing. If you can't pay the full amount, pay as much as possible above the minimum payment.
- Choose a card with a lower APR: Compare credit card offers to find one with a lower interest rate, especially if you plan to carry a balance.
- Consider a 0% introductory APR card: Some cards offer 0% interest on purchases or balance transfers for a limited time. This can be helpful for paying off existing debt without incurring additional interest.
2. Missed payments and late fees
Missing payments are one of the most common dangers of having a credit card—especially if you haven’t automated your payments. Paying late or not paying at all can have serious consequences. Not only will you incur late fees, but your credit score may also take a hit. This can make it more difficult to obtain loans or other forms of credit in the future.
“When you start missing payments, the interest piles up, making your debt grow faster than you can pay it down,” says Joe Camberato, CEO of National Business Capital, a national fintech lending platform. “This cycle can make you feel like you’re stuck paying and paying but never getting ahead.”
How to avoid:
- Set up automatic payments: This ensures that you never miss a due date. You can schedule payments for the full balance, minimum amount, or a fixed amount.
- Create reminders: Use calendar alerts, smartphone notifications, or budgeting apps to remind you when your payment is due.
- Budget carefully: Ensure that you have enough funds in your account to cover your credit card payments each month. “Use your credit card only for purchases you know you can afford, like groceries or gas—things you would normally buy with your debit card,” Camberato says. “This way, you’re not overspending, and you can still earn rewards or points without falling into debt.”
3. Overspending and impulsive purchases (we’ve all been there!)
Credit cards can make it easy to spend beyond your means, leading to overspending and accumulating debt.
“Anyone who struggles with impulse control will tell you it’s much easier to dig the hole than to climb your way back out of it,” Little says. “When we use a credit card, that quick plastic swipe disconnects us from what’s really happening—-cash is leaving our pocket. If we aren’t incredibly mindful as we spend, we end up buying more than we would if we were using cash alone.”
How to avoid:
- Stick to a budget: “Set a monthly budget based on your income and only use your credit card for purchases you can pay off immediately,” Little says. “If you don’t have the extra cash in your bank account, hold off on buying the item until you do.” (Here's how to make a budget in seven steps.)
- Use cash for discretionary spending: This may help control your spending. Using cash can make you more mindful of your spending habits.
- Monitor your spending regularly: Keep track of your credit card transactions and review your statements regularly. This will make you aware of your spending patterns and see if there are adjustments needed.
4. Potential damage to your credit score
Your credit score is a critical factor, influencing your ability to secure loans, mortgages, and other forms of credit. One of the dangers of credit card debt is using it irresponsibly, such as maxing out your limit or making late payments, which can significantly damage your credit score.
How to avoid:
- Keep your credit utilization low: “Try to use under 30% of your present credit limit to keep your credit utilization ratio low and maintain a high credit score,” Kilday says. For example, if your credit limit is $5,000, try to keep your balance below $1,500.
- Pay on time: Timely payments are crucial for maintaining a healthy credit score. Always pay at least the minimum payment by the due date.
- Check your credit report regularly: You can get a free credit report annually from each of the three major credit bureaus.
5. Identity theft and fraud
Main dangers of using credit cards: they're a common target for thieves. If someone gains access to your credit card information, they can make unauthorized purchases, potentially leaving you with a large bill.
How to avoid:
- Use secure websites for online shopping: Only enter your credit card information on secure websites (look for "https://" in the URL and a padlock icon).
- Monitor your accounts regularly: “If there are any erroneous or unauthorized charges, you can catch them in time and take prompt action,” Kilday says.
- Use virtual credit cards: Some banks offer virtual credit card numbers for online purchases, providing an additional layer of security.
6. Hidden fees and charges
How can credit cards hurt you financially? Well, there's the small print. These might include annual fees, foreign transaction fees, balance transfer fees, and more. Not being aware of these fees can lead to unexpected costs.
How to avoid:
- Read the fine print: Before applying for a credit card, carefully read the terms and conditions to understand the fees associated with the card.
- Choose a no-fee card: Look for credit cards that don't charge annual fees or foreign transaction fees, especially if you travel frequently or make international purchases.
- Limit balance transfers: Be mindful of balance transfer fees, which can range from 3% to 5% of the transferred amount. If you do transfer a balance, aim to pay it off before the introductory period ends.
7. Temptation to open multiple credit cards
Having too many credit cards can lead to financial trouble, including difficulty keeping track of payments and increased debt, main dangers of credit cards.
“If you struggle with managing your money, a credit card—or multiple—might not be the best option for you,” Camberato says. “This is especially true for younger people who are just starting to learn about finances. Credit cards require a level of responsibility and experience that not everyone has right away.”
How to avoid:
- Limit the number of cards you open: Stick to one or two credit cards that meet your needs and avoid the temptation to apply for more. This will help you manage your accounts more effectively.
- Focus on one card for rewards: Instead of juggling multiple cards, choose one with the best benefits for your spending habits.
- Close unused accounts carefully: If you decide to close a credit card account, be aware that it may affect your credit score. Weigh the pros and cons before making a decision.
Not sure how many credit cards are too many? Read this next: How Many Credit Cards Should I Have?
8. Financial emergencies
Relying on credit cards for financial emergencies can be risky. While it may seem like a quick fix, it can lead to long-term debt if you're unable to pay off the balance quickly.
How to avoid:
- Build an emergency fund: Save at least three to six months' worth of living expenses in a separate account. This will reduce your reliance on credit cards during unexpected financial emergencies.
- Use credit cards as a last resort: Only use your credit card to cover an emergency if you have no other option. Try to pay off the balance as soon as possible to avoid accumulating debt.
Bottom line
Credit card loans are particularly dangerous because of the high cost of borrowing, the ease of accumulating debt, and the potential long-term impact on your financial health.
“If you’re tempted to spend and have a ‘YOLO’ attitude, it can lead to catastrophic financial consequences,” Little says. “If that credit card will burn a hole in your pocket and increase how much you spend, don’t get one until you adopt better money habits.”
FAQs
Is it good to have a credit card and not use it?
Yes, having a credit card and not using it can positively impact your credit score by increasing your available credit and lowering your credit utilization ratio. However, be sure to monitor the account regularly for any unauthorized charges and ensure that there are no annual fees.
Where not to use a credit card?
Avoid using your credit card at places where security may be compromised, such as at gas pumps, public Wi-Fi connections, or websites without proper encryption. Additionally, be cautious when using your card for large purchases if you cannot pay off the balance quickly.
Can closing a credit card hurt your credit score?
Closing a credit card can negatively affect your credit score by reducing your available credit and potentially increasing your credit utilization ratio. It can also shorten your credit history, which is another factor that impacts your score.
What should I do if I can't make a credit card payment?
If you're unable to make a credit card payment, contact your credit card issuer immediately. They may offer hardship programs, such as temporary payment plans or interest rate reductions, to help you manage your payments.
With careful planning and responsible use, you can take advantage of the benefits of credit cards, which can be a valuable tool in your financial toolkit rather than a source of stress.