Should We Use Credit Cards? - Research Paper

Introduction

The large proportion of consumer debt in the United States is held in credit cards, and has gradually increased in the last two decades. The increase in consumer debt is due to the increase of the people acquiring credit cards as well as the increase in the aggregate number of traditional cards and industry-specific credit cards issued. The consequences in the increase of credit cards holders have been felt at various times specifically during the recession periods. The low times during such recessions were further aggravated by the huge consumer and personal debt owed leading to significant increase in bankruptcy and foreclosures. However, once the recession period is over, people quickly recoup, and consumer debt once again increases mostly due to credit cards. Thus although credit cards seem to be disadvantageous in the short terms, if properly used, credit cards possess various advantages to the individual as well as the economy at large.

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Credit cards act as a short term loan. This short term loan attracts a yearly percentage rate that represents the rate one pays as the interest charges accrue. The annual percentage rate for each person is determined by various factors such as creditworthiness, the type of credit card and payment history. As a result, people with a strong credit history have a lower yearly percentage rate that people with little or no credit history. Additionally, credit cards vary from debit cards in that unlike debit cards; they are not linked to a checking account and money used is not debited from an available balance in that account. Furthermore, credit cards attract a monthly bill or interest charges because there is money due after transactions. Also, credit cards, unlike debit cards, provides one with an opportunity to build their credit.

Credit cards are issued based on a credit line, which is the maximum amount of credit availed to a customer. A person's credit line is determined by various factors such as an individual's income, their credit history, and the amount of the available current credit. Thus as a person makes more purchases, the available balance usable at any given moment reduces. This strategy affords credit card holder various advantages and has also been proved beneficial to the growth of the economy. It can be difficult for most people to perceive debt as an advantage as it translates to an obligation to pay out of future income. Additionally, debt also means incurring costly interest charges with each passing day. However, debt from credit cards is in reality as a positive thing for an entire economy.

For instance, when people make use of credit cards, they are utilizing them as a way of financing their purchases they could not otherwise afford out of money they do not currently possess. Thus as they can make such purchases, various companies are then able to generate revenue they may not have received thus stimulating the economy. a recent survey revealed that seventy-six percent of people in the united states possess at least one credit card with nearly half the population in the country having credit card debt (Fleming). Thus in considering the millions of people using credit cards to make purchases, it is evident that credit card debt is indicative of healthy levels of economic activity. In reality, personal consumer spending in the United States accounts for more than two-thirds of the country's gross domestic product.

Another major advantage of using credit cards is that it enables one to build a good credit history. One way of building a good credit history through credit cards is by charging small purchases and paying them off on time. A good credit history is beneficial in that its absence makes it challenging for one to acquire loans such a mortgage or student loans, get a job or even to secure insurance. Although one can get a loan with a credit history, such a loan is typically subject to a higher loan rate. Thus having a good credit history is important as it helps in saving thousands of dollars on all major loans acquired (Agarwal et al. 245). For instance, in applying for a mortgage loan, the difference between an applicant with a good credit history and one with a bad credit history is in most cases thousands of dollars. Consequently, having a credit card and making timely and monthly installments is one of the most useful strategies for building a good credit history.

Credit cards also offer the advantage of a source of funds in case of an emergency. Although a real emergency fund is always the best option, not everyone is in a position to establish a real emergency fund in anticipation of events such as emergency airline tickets, medical emergencies, car repairs or dealing with natural disasters. In certain situations, such as when a person has been laid off unexpectedly, through a credit card, a person can still make essential purchases even when their income is low at least until a time when they get another job and can pay off the card's balances. Hence although having an emergency fund in cash is preferable, a credit card is the next best option of handling emergencies that pop up at a moment's notice.

Credit card fraud, as later discussed, is a major problem in the credit card industry. However, in the recent past, great strides have been made in ensuring safety while using credit cards. Also, credit cards are the best way to protect against fraud. Making payments through a credit card makes it easier for one to avoid losses from fraud. For instances, in case of a debit card, when a thief steals from a debit card, the money immediately goes missing from the cardholder's account. Such a situation can lead to the rejection of legitimate online purchases due to insufficient funds in the account. These missed or late payments can consequently lower one's credit score. Furthermore, a debit card holder, unlike credit cards, is liable for all the unauthorized purchases made by the debit card after two days. On the hand, theft and fraud protection is non-existence for cash transactions.

Credit cards are a short term loan, and as such, they have a grace period. Unlike a debit where when a purchase is charged to the card, the money is immediately removed from the accounts, purchases made through the credit card mean that the money remains in the checking account until one pays the credit card bill. It is advantageous for funds remaining in the account after a purchase has been made in that it adds to one's wealth (Omar et al. 62). By postponing payments of purchases, it makes the purchases cheaper in the long run as the money remains in the bank account longer thus continues to earn interest. Thus in case of a high-interest checking account, the money continues to earn interest during the grace period, and the extra interest can add up to a meaningful amount in the long run.

Credit cards also offer convenience. Most people do not like carrying around huge sums of money or any money for that matter. Such preferences are because, if you lose the money, it is gone. Credit cards, on the other hand, are convenient, small and offer better consumer protection. They offer convenience in making large dollar purchases as well as online transactions. They also offer convenience in the form of budgeting tools. The majority of credit card firms provide their clients with detailed logs of their card's transactions. Such logs can be handled easily by various money management tools thus making budgeting easier to plan and track.

However, credit cards also have several disadvantages. A major disadvantage of credit cards is that they are a danger of debt. In situations where they are utilized as a mean of payment, Credit cards afford convenience, security, a record of one's spending, and valuable potential rewards. However, when utilized as a finance method, credit card utilization can be disastrous. Cardholders may at first find that they can use credit cards and charge large payments to their accounts, as they only pay a small fee every month. However as interest charges add to their balance due to new purchases, they quickly and eventually find it hard to pay the minimum balance and risk defaulting. Regardless of whether they have accomplished the challenging objective of clearing their credit card obligation, or have experienced a difficult bankruptcy process, numerous individuals avoid them completely.

Subsequently, another disadvantage of credit cards is that they urge individuals to burn through cash that they do not have. Most Credit cards do not expect a person to make payments to clear the balance monthly, so regardless of whether an individual has a hundred dollars; one can still spend up to five hundred or one thousand dollars on the credit card. While this may appear as free cash at the moment, this is money that is to be paid back, and the more one delays in making payments, the more cash owed as Credit card organizations charge interest every month on the cash borrowed.

Furthermore, delays in credit card payments result in an increase in interest rates. Cardholders ought to have control over their credit card obligation and if achievable, make monthly payments towards their credit card balance. But, numerous cardholders cannot make monthly payments; thus interest payments increase rapidly. However, when cardholders make late installments or spend above their limit, they might be liable to increase in interest rates and additional penalties or fees. Furthermore, defaulting or late payments leads to decreased access to credit. A few Americans have less credit access as they may have been laid off, defaulted on loans, or experienced other monetary challenges. As a result, such individuals are no longer eligible for new credit cards.

The continued use of credit cards has also been known to result in credit card fatigue. Cardholders often become disappointed with their credit cards. Numerous individuals pay steep penalties and late fees or become casualties of credit card fraud. Others find that monitoring their charges, and paying each Credit card bill, is too tedious while other previous cardholders complain of negative encounters with their bank's client administration division. Such experiences eventually lead to most credit card fatigue in most individuals who opt to do away with the use of credit cards all the challenges associated with them.

However, the most significant disadvantage is credit card fraud. Credit cards occur when a person losses their credit cards which are then used for inappropriate activities. People can have their cards stolen from them legitimately; however, the large portion of stolen Credit card takes place through the postal services. The most popular sort of theft results from penetration of, and theft inside, the post office. Different kinds of Credit card robbery involving the postal framework incorporate the stealing of mailboxes especially in apartment buildings, assaults on and stealing from mail transporters, and hijackings by well-organized groups from the post offices (Fernandes, et al).

An expansion in the faulty utilization of credit cards at fuel stations is also connected to credit card robbery. Customers can utilize credit cards with in-pump terminals without having any contact with assistants. These pump terminals appear to have a strangely high frequency of ghost or phantom transactions, in which approval is given for a Credit card transaction which is subsequently canceled without any purchase. Typically, these ghost transactions involve people trying out stolen credit cards before using them in situations that require face to face transactions (Hille, Walsh, and Cleveland 8). Similarly, Credit card scams are another disadvantage in the use of credit cards. Credit card scams have been increasing in the United States with identity theft being the greatest type of credit...