The Paradox of Credit Cards

by : Joseph Kenny

Credit cards can be a dangerously quick way to accumulate debt. At the same time, they are nigh-indispensable in today's economy. Mundane activities such as renting a car or starting dealings with a new bank all require you to show your credit card.

A credit card proves your financial solvency. In some ways, it's also practical. If you have a high credit limit, you can charge payments to your card without having to always have cash with you, and without worrying about overdraft fees from your bank. Moreover, if something comes up, you always have a ready source of temporary money.

Unfortunately, how you pay off your credit cards affects what kinds of credit cards you can get. If you have a low credit rating, you'll have trouble finding a good credit card offer. The high annual percentage rates (APRs) on the few cards that people with low credit scores do qualify for, only make it harder for the people to pay them on time, causing people's scores to go even lower.

Such is the paradox of credit cards: they're necessary, yet they're easy to misuse. Using them carefully can make your credit rating go up. At the same time, not being frugal and not reading the fine print can cause you to run up a huge, high-interest debt. Then, one day, your bills and expenses are just too high, or you lose your job, and you just can't make that minimum payment: your credit rating plummets.

What should you do if your credit rating is abysmally low and you receive a credit card offer? Oddly enough, the answer is often to take up that offer.

Of course, the credit cards you're going to be offered once your credit goes down won't seem as tempting as before. Get ready to see annual percentage rates approaching 20% or even 24%. Or, you'll see cards offering comparatively low APRs, such as 10% (this figure will start to seem low to you). Then, you'll be bombarded with additional fees, for anything from account setup, to participating in the credit program, to having to pay an annual fee just to maintain the card. Yes, all those fees are different. All in all, you may pay up to $200 a year in fees for the privilege of owning a credit card.

Why should you accept such terrible bargains? Although it's painful to own these credit cards, they can be one of the fastest ways to raise your credit rating. Psychologically, they can be a big help when it comes to learning to cultivate frugality. You won't be tempted to up a run big bill, because you know the interest rate on that bill is going to be obscenely high.

Nowadays, there are even credit cards that reward consumers for using the cards to make purchases and paying their bills on time. Those deals used to be offered only to those with credit scores on the upper end of the FICO scale, but the recent credit crisis has caused many lenders to change their business strategy. Plus, many credit cards let consumers pay their bills online, making on-time bill payment easier than before if you are lazy about sitting down and going through paperwork.

The best advice here is to do a lot of research, before you get a credit card targeted at those with low credit. Then, focus on making small purchases and paying off all your bills.