45

Recently I was approved for my first credit card, and I was trying to find out the exact repercussions that using it would have on me, and my credit.

For now I've only been using the credit card for things I would buy normally and I pay them off almost immediately, usually once they post to my online account. However, I'm soon to be moving into an apartment and I'm contemplating using the card to furnish the apartment, paying it off over time, which I know is the point of the card.

What I'm wondering is, what kind of effects will usage like this have on my credit, and is it worth doing?

EDIT: There were more answers to this than I was ever expecting. Thanks for all of the responses. I got a lot of useful information from everyone. I ended up being inside of a 15 month grace period with no interest on purchases, so I did end up using the card more than I probably would have without that. That said, I'll be paying it all off today, and in the future this information is going to keep me from getting myself into a lot of trouble.

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    Just a heads up from someone who recently went through everything you're describing: if you're buying a lot of new furniture, stores will often offer financing with no interest payments for the first few months up to a couple of years. Qualifying can also depend on your credit history. – bpeav Aug 16 '16 at 19:18
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    "...paying it off over time, which I know is the point of the card." That's not quite right. That is the point of the card for the credit card company, not for you. The only reason they want you to run up a long term credit balance is to make money from you! – alephzero Aug 16 '16 at 20:31
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    I can't stress credit card rule one enough. NEVER EVER spend more then you actually already have in money. In an emergency you can chose to break that rule, but for day to day, or normal things, you should NEVER spend more money then you actually have. – coteyr Aug 17 '16 at 14:25
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    @coteyr Do you have a mortgage? – JimmyJames Aug 17 '16 at 15:24
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    @JimmyJames, No, but the same applies to mortgages. You don't get a mortgage for more then you have. The difference in that case is that you "have" an asset in the house. You don't have an asset in that couch from Rooms to Go. You should never mortgage a house for more then its value. – coteyr Aug 17 '16 at 15:28

16 Answers 16

59

There are a couple of things to consider.

First, in order to avoid interest charges you generally just need to pay the statement balance before the statement due date. This is your grace period. You don't need to monitor your activity every day and send immediate payments. If you're being really tight with money, you can actually make a little profit by letting your cash sit in an interest bearing account before you pay your credit card before the due date.

Second, credit card interest rates are pretty terrible, and prescribed minimum payments are comically low. If you buy furniture using your credit card you will pay some interest, be sure to pay way more than the minimum payment. You should avoid carrying a balance on a credit card. At 20% interest the approximate monthly interest charge on $1,000 is $16.67.

Third, if you carry a balance on your credit card you lose the interest grace period (the first point above) on new charges. If you buy your couch, and carry the balance, when you buy a soda at 7-11, the soda begins to accrue interest immediately. If you decide to carry a balance on a credit card, stop using that card for new charges. It generally takes two consecutive billing period full balance payments to restore the grace period.

Fourth, to answer your question, using a credit card to carry a balance has no impact on your score. Make your payments on time, don't exceed your limits, keep your utilization reasonable. The credit agencies have no idea if you're carrying a balance or how much interest you're paying.

To Appease the people who think point four needs more words:

Your credit report contains your limit, your reported balance (generally your statement balance), and approximate minimum payment. There is no indication related to whether or not the balance contains a carried balance and/or accrued interest. The mere fact of carrying a balance will not impact your credit score because the credit reporting bureaus don't know you're carrying a balance. Paying interest doesn't help or hurt your score. Obviously if your carried balance and interest charges push your utilization up that will impact your score because of the increased utilization. Make your payments on time, don't exceed your limits, keep your utilization reasonable and your score will be fine.

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    Note that most (all that I've ever had, actually) credit card companies can be set up to automatically direct-debit 100% of the balance from your bank account on the due date. I highly encourage you to do this. (And, of course, to make sure that you never spend more than you have the balance for.) That way, you never have to worry about sending the bill in or missing a payment, and it puts the temptation of exceeding your resources "just this month!" one step further away. For my current card, I can configure this online easily; for others, I had to call or even send in a paper form. – mattdm Aug 16 '16 at 20:23
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    Carrying a balance does impact your credit score due to an increase in utilization. As do the types of accounts as a store card will typically lower your score. The rest of the answer is solid – Eric Aug 17 '16 at 4:23
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    @quid, the part about them not know your balance isn't correct. I use ClearScore to track my score and that lists my balance at the time of the last report. – Ash Burlaczenko Aug 17 '16 at 8:03
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    no impact on your score? I thought that in US, UK, and Canada, to build a credit score at all (coming from zero as an immigrant), the recommended strategy is to get a credit card, use it, and pay off the balance every month. Are you saying this strategy does not work? – gerrit Aug 17 '16 at 9:20
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    @gerrit In the US, the way the credit reporting system works, use your card every month, pay in full every month, keep utilization under 30%, and your score will be boosted. The key is that you pay AFTER the credit report is issued and BEFORE the due date. Interest is calculated based on balance after due date passes. – Xalorous Aug 17 '16 at 23:18
33

Using the card but paying it off entirely at each billing cycle is the only "Good" way to use a credit card. If you feel like you will be tempted to buy more than you can pay back don't use credit.

As far as furnishing the apartment, the best thing to do would be to save and pay cash, but if you want to use credit the credit available at stores would be a far better deal than carrying it on a card.

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    In the US the "credit at stores" is usually much much worse then rates you can get though your bank (for example). Usually stores provide "revolving" credit cards as their "credit". Try a secured card instead if you can. These are usually much much lower interest rates. – coteyr Aug 17 '16 at 14:23
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    @coteyr, the "credit at stores" is only attractive if you get a 0% interest deal, but you have to pay it off in the 0% period, or, you're right, the interest rate is terrible. – JPhi1618 Aug 17 '16 at 18:41
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    Store credit accounts typically charge even higher rates than major credit cards. – Xalorous Aug 17 '16 at 23:27
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    i disagree the best thing to do would be to save and pay cash. you should save the amount the furniture costs in cash, then use a credit card to pay for the furniture, then pay off the credit card. that way you get rewards points on your card, which (imo) is the only reason to use credit cards (and it's a good one). buying ANYTHING with cash is simply a waste of free rewards points. i strive to use credit cards for every single purchase i make. – ell Aug 19 '16 at 19:13
  • @sgroves I think your way is solid IF you are committed to staying on top of all your bills in a really timely manner. It only takes one slip up to wipe out the benefit from a bunch of purchases in your manner. – Pablitorun Oct 3 '16 at 15:10
28

Credit cards have three important advantages. None of them are for day-to-day borrowing of money.

  1. Safety - Credit cards have better fraud protection than checks or cash, and better than most debit/check cards. If you buy something with a credit card, you also get the issuer's (think Visa) assurances that your will get the product you paid for, or your money back. At almost any time, if a product you buy is not what you expect, you can work with the issuer, even if the store says "screw you".

  2. Security - Credit cards are almost universally accepted as a "security" against damages to the vendor. Hotels, car rentals, boat rentals etc. will accept a credit card as a means of securing their interests. Without that, you may have to make huge deposits, or not be able to rent at all. For example, in my area (touristy) you can not rent a car on debit or cash. You must use a credit card. Around here most hotel rooms require a credit card as well. This is different from area to area, but credit cards are nearly universally accepted.

  3. Emergencies - If you're using your credit card properly, then you have some extra padding when stuff goes wrong. For example, it may be cheaper to place a bill on a credit card for a couple months while you recover from a car accident, than to deplete your bank account and have to pay fees.

Bonus - Some cards have perks, like miles, points, or cash back. Some can be very beneficial. You need to be careful about the rules with these bonuses. For example, some cards only give you points if you carry a balance. Some only give miles if you shop at certain stores. But if you have a good one, these can be pretty fantastic. A 3% cash back on purchases can make a large difference over time.

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    There can be. US law says that (not totally complete) that you are responsible for no more then $50 of a credit card charge if that charge was made fraudulently, or $0 if it was a Card not present transaction. There are no such protections on debt cards (though a lot of banks add them in). Same is true with purchases. With credit cards Visa makes the decision to charge back. With debt cards the seller makes the decision. investopedia.com/articles/personal-finance/050214/… for more info. – coteyr Aug 17 '16 at 16:23
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    @Agent_L If your debit card is compromised the day you pay your bills then those payments will come back with insufficient funds. Even if a bank agrees to give you the money back from the fraudulent charges immediately, it is unlikely they'd also pay the fees that will likely be associated with those NSF payments. If your credit card is compromised then you can still pay all your other bills and there's no time delay to get money put back in your account because it never left. – Dean MacGregor Aug 17 '16 at 16:27
  • @DeanMacGregor This is benefit of having separate account that's innate to a credit card, but replicating this with debit is merely a matter of opening another account. Good point though. – Agent_L Aug 17 '16 at 16:30
  • @Agent_L well opening multiple credit cards doesn't require liquid cash to set aside in a new checking account. Having multiple debit cards does. – Dean MacGregor Aug 17 '16 at 16:35
  • @Agent_L We must be defining what a debit card is differently then. A debit card here, pretty much be definition, is a card linked to your checking account that takes money out as soon as you make a purchase. A debit card associated with a $0 balance account would be worthless. – Dean MacGregor Aug 17 '16 at 16:45
15

"paying it off over time, which I know is the point of the card"

That may very well be the card issuer's goal, but it need not be yours. The benefits, as your question title seems to ask for -

  • Card issuer guarantee on transaction (i.e. no delivery, you don't pay)
  • Extended warranty on product (mine doubles warranty up to a year)
  • Consolidation of bills, one or two card bills per month, vs a dozen different accounts.
  • Ease of tracking annual spending, one set of papers to go through.
  • Ease of transactions - try to reserve a hotel room or rental car with cash.
  • Safety - Do you really want to walk around with thousands of dollars in your pocket?
  • Rewards/ Rebates - A good card will give you back 2% cash on every purchase. I have a 529 college saving account funder 100% with this reward. It will pay for more than 3 semesters of my daughter's college. In 19 years, I've paid Zero interest, Zero annual fee.

That said, use the card, but don't spend more than you have in your checking account to pay it when the bill comes.

What you may want to hear - "Charge the furniture. Pay it off over the next year, even at 20%/yr, the total interest on $2000 of furniture will only be $200, if you account for the declining balance. That's $4/week for a year of enjoying the furniture."

You see, you can talk yourself into a bad decision. Instead, shop, but don't buy. Lay out the plan to buy each piece as you save up for it. Consider what would happen if you buy it all on the card and then have any unexpected expenses. It just gets piled on top of that and you're down a slippery slope.

  • Interest on 2000 at 20% APR compounded monthly is > 400, probably closer to $500. – Xalorous Sep 30 '16 at 16:32
  • @Xalorous - ?? $2000/20%/12mo. Payment is $185.27, total $2223.23. $223.23 interest. A bit over my $200, but not $400. "if you account for the declining balance" - did you read my entire answer? Keep in mind, that was a hypothetical quote, what OP wants to hear. He wants the speaker to round down, not up. – JoeTaxpayer Sep 30 '16 at 16:50
  • I don't understand why the calculators agree with you. At simple interest, 20% of 2000 is 400. Compound interest is supposed to be higher. It would have to be not only declining balance, but the rate at which the balance is declining. Either way, your point is valid. When we use a card, we're paying someone to use their money. Better to save our money, let it earn interest while you save, and then purchase when you can afford it. – Xalorous Sep 30 '16 at 16:55
  • You would be right. If OP borrowed $2000 and paid it off a year later. With zero payments in between. My answer mentioned 'declining balance' which means the 12 payments makes the 'average balance just over half the amount borrowed. My napkin math was 6/12*20%*2000=$200. That gets me within 10% or so of the true number. For short loans, this is close. Not for mortgages. – JoeTaxpayer Sep 30 '16 at 16:57
12

Credit card interest rates are obscene. Try to find some other kind of loan for the furnishings; if you put things on the card, try to pay them off as quickly as possible.

I should say that for most people I do recommend having a credit card. Hotels, car rental agencies, and a fair number of other businesses expect to be able to guarantee your reservation by taking the card info and it is much harder to do business with them without one. It gives you a short-term emergency fund you can tap (and then immediately pay back, or as close to immediately as possible). Credit cards are one of the safer ways to pay via internet, since they have guarantees that limit your liability if they are misused, and the bank can help you "charge back" to a vendor who doesn't deliver as promised. And if you have the self-discipline to pay the balance due in full every month, they can be a convenient alternative to carrying a checkbook or excessive amounts of cash.

But there are definitely people who haven't learned how to use this particular tool without hurting themselves. Remember that it needs to be handled with respect and appropriate caution.

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    Pay them off when you get the bill. Otherwise you lose one of the only benefits of using the card, building credit rating. – Xalorous Aug 17 '16 at 23:39
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Everyone else seems to have focused (rightly so) on the negatives of credit cards (high interest rates) and why it is important to pay them off before interest starts accruing.

Only Marin's answer briefly touched on rewards. To me, this is the real purpose of credit cards in today's age. Most good rewards cards can get you anywhere from 1-2% cash back on ALL purchases, and sometimes more on other categories. Again, assuming you can pay the balance in full each month, and you are good at budgeting money, using a credit card is an easy way to basically discount 1-2% of all of the spending you put on your card. AGAIN - this only works to your advantage if you pay off the credit card in full; using the above example of 20% interest, that's about 1.6% interest if the interest compounds monthly, which wipes out your return on rewards if you just go one month without paying off the balance.

  • I think the other benefits are important, but also agree with you here -- rewards are the primary reason I use my credit cards, and the basis I use for selecting them. It's a guaranteed and continual benefit, whereas I've never had occasion to use an extended warranty benefit (for example). – Matthew Read Aug 18 '16 at 19:21
  • Regarding rewards, without heavy spending, do the rewards even amount to anything? 1 to 2 cents back seems like it would take a long time to amount to anything. – Ranma344 Sep 22 '16 at 20:24
9

One thing that has not been pointed out as a disadvantage of using Credit Cards: people tend to spend more. You can see This Study, and this one, plus about 500 others. On average people tend to spend about 17% more with credit cards then with cash. This amount dwarphs any perks one gets by having a credit card.

The safest way to use one is to only use them for purchases where you cannot make a decision to spend more. One example would be for utility bills (that don't charge a fee) or at the gas pump.

Using them at Amazon might have you upgrade your purchase or add some extra items. Using them at restaurants might encourage you to order an extra drink or two. Using them at the coffee shop might have you super size your coffee or add a pastry.

Of course this extra spending could lead you into a debt cycle exacerbating the financial hit many struggle with. Please tread carefully if you decide to use them.

6

Note: this answer is true for the UK, other places may vary.

There are a couple of uses for credit cards.

The first is to use them in a revolving manner, if you pay off the bill in full every time you get one then with the vast majority of cards you will pay no interest, effecitvely delay your expenses by a month, build your credit rating and with many credit cards you can also get rewards.

Generally you should wait until the bill comes to pay it off. This ensures that your usage is reported to the credit ratings agencies.

In general you should not draw out cash on credit cards as there is usually a fee and unlike purchases it will start acruing interest immediately.

The second is longer term borrowing. This is where you have to be careful. Firstly the "standard" rate on most credit cards is arround 20% APR which is pretty high. Secondly on many cards once you are carrying a balance any purchases start acruing interest immediately.

However many credit cards offer promotional rates. In contrast to the standard rates which are an expensive way to borrow the promotional rates often allow you to borrow at 0% APR for some period. Usually when it comes to promotional rates you get the best deal by opening a new credit card and using it immediately.

Ideally you should plan to pay off the card before the 0% period ends, if you can't do that then a balance transfer may be an option but be aware than in a few years the market for credit cards may (or may not) have changed.

Whatever you do you should ALWAYS make sure to pay at least the minimum payment and do so on time. Not doing so may trigger steep fees, loss of promotional interest rates.

There is a site called moneysavingexpert that tracks the best deals.

  • "Ideally you should plan to pay off the card before the 0% period ends" Careful, there can be a trap here. Some cards have clauses where if you do not pay the balance within the promotional period, you get to pay the interest retroactively. – Xalorous Aug 17 '16 at 23:42
6

In the UK, using a credit card adds a layer of protection for consumers. If something goes wrong or you bought something that was actually a scam, if you inform the credit card company with the necessary documents they will typically clear the balance for that purchase (essentially the burden of 'debt' is passed to them and they themselves will have to chase up the necessary people).

Section 75 of the Consumer Credit Act

I personally use my credit card when buying anything one would consider as "consumer spending" (tvs, furniture ect). I then pay off the credit card immediately. This gives me the normal benefits of the credit card (if you get cashback or points) PLUS the additional consumer credit protection on all my purchases.

This, in my opinion is the most effective way of using your credit card.

  • 1
    Paying off immediately is not the most effective way of using a credit card, paying off due balance fully on the last day is. Best if you can set up the card to auto-repay from a saving account and keep a hefty sum (month worth of CC spending) there. – Agent_L Aug 17 '16 at 16:39
  • @Agent_L That is true if you wish to build credit, if you are not concerned about your credit (hey you have a credit card, so it can't be that bad) then my recommendation would be to reduce the risk of accidentally missing a payment and paying it off as soon as possible. (as mentioned above). – Jay Sep 20 '16 at 7:50
  • @Agent_L What is, exactly, the difference between the two options? How is paying it off at the end of the period more beneficial? – Ranma344 Sep 22 '16 at 20:21
  • @RCarpenter You get free (0% interest) loan that lasts from the day of purchase to the day of payment. Therefore to extract the most value you should theoretically make the purchase on the very first day of billing period and pay it off at the very last due day. This way you get the advertised "52 days of interest-free loan". This time you can use to put the money into work, eg put them on savings account. – Agent_L Sep 23 '16 at 8:55
  • @Jay 1) building up credit history has nothing to do here. 2) There is no risk of missing a payment: instead of ordering a transfer today with current day you just order a transfer today with future date. Anyway, you can have a checking account in same bank as CC and set up automatic repayment order, so it's bank burden, not yours. If you can set the order from account with interest, then you've set up a self-operating money-making machine (ok, penny-making machine). – Agent_L Sep 23 '16 at 9:02
4

The thing you need to keep in mind is that if you take on debt, you need to have a plan to pay it off and execute on it. You also need to understand what your carrying cost is (what you will pay in finance charges every month.) There are times when you need to take on debt in order to be a productive person. For example, in many places in the US, you need a car in order to have a job. It's ludicrous for someone to assert that you shouldn't take on any debt in order to get a reliable vehicle. That doesn't mean you go out and lease the fanciest car that you can get on your income.

In this case, I'd say it's a bit of a grey area. Could you live in an unfurnished apartment for a while? Perhaps. Many people would have a hard time living like that and it could affect your ability to perform at work. I would argue that buying a decent mattress to sleep on falls under the same category as getting a car so that you can work. You don't want to be missing work because your back is in spasm from sleeping on the floor or a worn out mattress.

As far as the rest of it goes, it really depends on how fast you can pay it off. If you are looking at more than a few months (6 tops) to pay off the purchase in full, you should reassess. Realize that the interest you are paying is increasing the cost of the furniture and act accordingly. As mentioned, you can often get 0% financing for a limited period. Understand that if you don't pay off the entire balance in that period, you will normally be retroactively charged interest on the entire starting amount and that interest rate will likely be quite high.

The problem with credit is when you start using it and continually growing the balance. It's easy to keep saying that you will start paying it off later and the next thing you know you are buried. It's not a big one-time purchase (by itself) that normally gets people into trouble, it's continual spending beyond their means month after month.

3

One of the more subtle disadvantages to large credit card purposes purchases (besides what the other answer mentions), is that it makes you less prepared for emergencies.

If you carry a large balance on your credit card with the idea that your income can easily handle the payments to beat the no-interest period, you never know when you'll have an unexpected emergency and you'll end up having to pay less, miss the deadline and end up paying huge interest.

Even if you are fastidious about saving and budgeting, what if your family comes under a large financial burden (just as one possible example)?

  • I see the merit in this, definitely, assuming you meant to say purchases, rather than purposes. It makes total sense that the card becomes less valuable in an emergency the more balance it carries. – Ranma344 Sep 21 '16 at 18:17
2

never carry a balance on a credit card. there is almost always a cheaper way to borrow money. the exception to that rule is when you are offered a 0% promotion on a credit card, but even then watch out for cash advance fees and how payments are applied (typically to promotional balances first).

paying interest on daily spending is a bad idea. generally, the only time you should pay interest is on a home loan, car loan or education loan. basically that's because those loans can either allow you to reduce an expense (e.g. apartment rent, taxi fair), or increase your income (by getting a better job). you can try to make an argument about the utility of a dollar, but all sophistry aside you are better off investing than borrowing under normal circumstances. that said, using a credit card (with no annual fee) can build credit for a future car or home loan.

the biggest advantage of a credit card is cash back. if you have good credit you can get a credit card that offers at least 1% cash back on every purchase. if you don't have good credit, using a credit card with no annual fee can be a good way to build credit until you can get approved for a 2% card (e.g. citi double cash). additionally, technically, you can get close to 10% cash back by chasing sign up bonuses. however, that requires applying for new cards frequently and keeping track of minimum spend etc.

credit cards also protect you from fraud. if someone uses your debit card number, you can be short on cash until your bank fixes it. but if someone uses your credit card number, you can simply dispute the charge when you get the bill. you don't have to worry about how to make rent after an unexpected 2k$ charge.

side note: it is a common mis-conception that credit card issuers only make money from cardholder interest and fees. card issuers make a lot of revenue from "interchange fees" paid by merchants every time you use your card. some issuers (e.g. amex) make a majority of their revenue from merchants.

  • "borrowing money is nearly always a bad idea" [Citation Needed]! – Navin Aug 20 '16 at 13:18
  • citation needed? "bad idea" is a value statement. as such, by definition, a subjective statement of opinion not fact. this ain't wikipedia ;) – james turner Aug 20 '16 at 14:43
  • Card issuers also make money from the annual fee (if there is one). – smci Aug 22 '16 at 11:09
  • @smci good point. i have bolded "with no annual fee" to ensure that detail is not overlooked. – james turner Aug 22 '16 at 15:13
1

If you can use and pay off your credit card in full every month, there are plenty of benefits including improved credit, reward points and more. Many fall into the trap of just making the minimum payments and facing high interest charges or missing payments and getting a hit on their credit reports.

To start off, put something small that you know you can pay off every month. It could be your Netflix or your gas. Make sure you pay it off before any interest is accrued. Over time, you can ask for higher limits to boost your utilization rate.

1

I just want to stress one point, which has been mentioned, but only in passing.

The disadvantage of a credit card is that it makes it very easy to take on a credit.

paying it off over time, which I know is the point of the card.

Then you fell into the trap of the issuer of the card. They benefit if you pay off stuff over time; that's why taking up a credit seems to be so easy with a credit (sic) card. All the technical aspects aside, you are still in debt, and you never ever want to be so if you can avoid it. And, for any voluntary, non-essential, payment, you can avoid it.

Buy furniture that you can pay off in full right now. If that means only buying a few pieces or used/junk stuff, then so be it. Save up money until you can buy more/better pieces.

-1

An advantage of using a major credit card is that they act as a buffer and source of recourse between you and the merchant. Cheated and the store won’t answer you letters? Call Visa (or more accuratly, call the number on the back of the card).

(That is, #2 on this answer, which you can also reference for a whole list of benefits.)

  • 6
    No, don't call Visa. Visa is basically just a broker. Instead, call the bank that issued your Visa-branded card to you. They are the party that you have a business relationship with. That they, in turn, have a business relationship with Visa is immaterial. – a CVn Aug 17 '16 at 11:02
  • So why am I getting downvotes for a perfectly good "pro"? – JDługosz Aug 22 '16 at 21:12
  • I didn't down vote you, but your answer makes no sense. – NuWin Aug 23 '16 at 6:45
  • I don't understand how the answer makes no sense. It seems like a perfectly understandable sentence as I re-read it. – JDługosz Aug 23 '16 at 11:32
  • Another example of a post where credit card is suggested specifically for protection. – JDługosz Aug 28 '16 at 5:47
-2

Personally the main disadvantages are perpetuation of the credit referencing system, which is massively abused and woefully under regulated, and encouraging people to think that it's ok to buy things you don't have the money to buy (either save up or question price/necessity).

protected by Ganesh Sittampalam Jan 13 '18 at 13:48

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