Credit Cards are a double-edged sword. If used correctly, it can be a powerful tool in one's financial arsenal. Abused, and they can lead one's life to a terrifying crisis.
Before we dive into the details of using a credit card, we first must understand why credit cards were made.
Credit cards were not always around. They first appeared in 1950 as an early form of a "charge card" where a person would simply pay the entire amount owed at the end of each month. It gave people the flexibility to purchase items without needing cash on hand. It was a more fancier method of "putting it on one's tab," so to speak. So long as the owed amount was paid every month, there was no issue.
This simple idea eventually caught on over the years as businesses began issuing their own charge cards and in 1958, Bank of America would launch BankAmericard, considered the first modern credit card. Unlike its predecessors, this "credit card" would contain a credit limit that prevented people from spending excessively until the owed amount was paid off. For those that didn't pay on time, a heavy fee was incurred in the form of interest on the owed amount. Credit cards had essentially become instant, unsecured personal loans that anyone could get, no questions asked.
The Credit Card provided three essential benefits to the economy: convenience to customers, higher business traffic, and monetary protection. People that normally did not have money until the next paycheck could now purchase goods on the fly and simply pay it back the next time they have money available. This led to higher business traffic as people could simply "finance" their purchases with a bank's money and get their goods immediately instead of having to wait to pay for it with their own money. Of course, this immediate access to unsecured credit meant some people were going to spend more than what they could afford, which is where the last point of monetary protection comes in. The businesses themselves get money from the bank itself as people use credit cards to make purchases. This leaves the bank holding the debt instead, and in return for holding the debt for the credit cardholder, the cardholder promises to make minimum payments each month on the principle debt and the accrued interest on that debt.
Everyone wins. Except for credit card abusers.
Credit Cards were originally designed to be a stop-gap for those without immediate access to cash. It was back in the day when everything was paid in physical money, and you would have to cash out of the bank every time to go shopping. Credit Cards allowed people to spend money without physically carrying money, making everyday business transactions quick, simple, and most importantly, safe.
It's when people begin to abuse the purpose of a credit card that gets them in trouble. Instant access to credit does not equate to a larger cash pile. No matter if it's $10, $100, or $1000, that money is the lender's money, and eventually it must be paid in full. Credit cards are built solely for convenience, nothing more. Indeed, everything designed around the credit card is to encourage you to be a responsible credit cardholder. The annual fees prevent would-be abusers from obtaining free credit, the high interest rates discourage irresponsible debtors, and the rewards, cash backs, and increasing available credit limit encourages good financial habits.
It is because of these characteristics that credit cards are considered so heavily in determining one's Credit Score, the measure of how financially responsible you are. Credit Cards are instant, trackable, and repeatable in a very short amount of time, something which other loans such as mortgages can't reasonably determine early on.
Good credit card users reap all the benefits and rewards from proving themselves to be financially reliable people. More people are willing to lend to them for much more at much favorable rates because they've proven themselves to be dependable and trustworthy with money.
Bad credit card users suffer all the drawbacks, with little leniency. Credit lines dry up, interest payments accumulate, options dwindle, and everyone is made aware of the bad financial reputation you possess.
Credit Cards are just like any other type of loan. They can hurt you, or they can help you. However you must be wise in its use. Abuse its power, and it will return to abuse you. Care for it, and it will care for you. Budget below your means, and never include what the Credit Card provides. Avoid spending more than you can currently afford without the Credit Card, and always pay the debt back on time without fail. People are trusting you to be financially responsible with their own money. Prove you are indeed responsible, and they will support you without hesitation.
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