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The recent economic meltdown has put the pitfalls of consumer credit on center stage. We all know someone who has a horror story relating to their credit cards. Some people are seeing their interest rates skyrocket due to late payments on other bills; a concept known as universal default, and others are seeing their credit limits drop as banks try to limit their risk. Default rates are rising as households deal with the new economy. With all of the problems that can be caused by the reckless use of credit, it can sometimes be hard to see the many advantages of using credit wisely.

Establishing a credit history is crucial for your financial life. If you plan on purchasing a car or house using a loan, you will need a credit history so the bank can justify giving you a low interest rate. Even an increase of a few tenths of a point in interest rate could cost you tens of thousands of dollars over the lifetime of a mortgage. Your credit history and credit score may also impact your ability to purchase auto insurance or even to receive a job offer.

Traveling is much less stressful if you have a credit card. Buying a plane ticket, reserving a hotel room or renting a car are difficult, if not impossible, without a credit card. You may be able to use an ATM card backed by one of the large credit card companies instead of a credit card in some situations, but this leaves you vulnerable if there is a dispute over charges.

Consumer protection that comes with most credit cards is a benefit that normally does not become apparent until you need to use it. Many credit cards allow you a wide latitude to dispute charges that you feel were unauthorized or that were for products or services you found unsatisfactory. In addition, fraud protection provided by credit card companies can be an important weapon against identity theft.

On a more basic level, credit cards can be used to pay for unexpected, large expenses. Having cash in an emergency fund would be preferable to using a credit card, but using credit may be better than other options, including title loans, payday advances, cashing out life insurance policies, or taking loans from your 401(k) account.

The following advantages only apply if you rarely or never pay finance charges.

Several credit card companies offer loyalty cards that pay you back with airline miles, cash, or points. In exchange for these perks, loyalty cards carry a higher interest rate than non-loyalty cards and may include an annual fee. If you do not carry a balance, the higher interest rate is not detrimental and if the value of the benefits you would earn are more than the annual fee, you should consider carrying a loyalty card.

Credit can also be used to have more control over household cash flow in that it allows for a short delay between purchase and payment. This short delay can allow you to manage other bills if needed. This becomes apparent if you are able to use two credit cards with billing cycles 14 days apart. If credit card A has a cycle end date of day 1 and credit card B has a cycle end date of day 15, using credit card A between days 2 and 15, and credit card B between days 16 and 1 can allow you to maximize your time between purchase and payment.

Consumer credit has many drawbacks for those who are not able to pay their credit cards off in full every month, including hefty finance charges and the uncertainty of the current credit market. Establishing a credit history and using the protections provided by credit cards are essential, and additional benefits are available to those who can use credit to their advantage.

Learn more about this author, Erin Doherty.
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