If there's one thing credit cards have going for them, it's convenience. Rather than have to constantly hit the ATM and load up on cash, with a credit card, all you need to do is whip out a piece of plastic and charge your way through life. Don't have a few dollars for that morning coffee you like to get on your way to work? No problem -- your credit card will solve that.
But while credit cards are unquestionably convenient, they can also open the door to financial ruin. Here are just a few reasons to steer clear of them.
1. They make it easy to overspend
When you pay with cash or a debit card, you're generally limited to the amount of money in your account. This means that if you're nearing the end of the month and deplete your balance, you can't charge or pay for anything more. Credit card companies, however, don't know how much money you have in the bank, and don't care. They simply set your credit limit based on data you provide, and once you have your card issued, you're free to charge as much as you'd like up until you reach your credit limit. But this can lead to a lot of excess spending, since you're not limited to your take-home pay on a monthly basis.
Furthermore, when you have to physically hand over cash to make a purchase, a signal will occasionally go off in your brain alerting you to the fact that you're paying too much. Credit cards don't have that same impact, which means you're more apt to spend money you shouldn't be spending.
2. They charge a lot of interest
Credit card companies don't just let you charge away out of the goodness of their hearts. Any time you fail to pay your balance in full, they get to charge you interest on whatever amount you can't cover immediately. And those interest charges can be huge. It's not uncommon to have a rate that's upward of 20%, and the lower your credit, the higher your rate is likely to be.
Furthermore, credit card interest can compound daily so that for each 24-hour period you carry a balance, you accrue just a bit more interest. That interest is then added to your existing principal and interest, thus kick-starting a vicious cycle you might struggle to break out of for years.
3. They can damage your credit score
Though it's true that credit cards can actually help you build credit, abusing them -- which many folks tend to do -- can easily ruin your credit. Of the various factors that make up a credit score, credit utilization is one that carries a lot of weight. Your credit utilization ratio represents the amount of credit you're using at once relative to your total line of credit, and the higher that number is, the more it can hurt your score. Therefore, if you charge up a huge balance on your credit card, it can send your credit utilization ratio into unfavorable territory, thus taking your score down with it.
4. They come with a lot of fees
If you make a habit to pay your bill in full every month, you can avoid the interest charges we talked about earlier -- but that doesn't mean you won't be liable for certain fees associated with your credit card. Some cards, for example, charge an annual fee just for having an account, while others impose charges for foreign transactions. And let's not forget late payment fees, which apply every time you fail to submit your minimum payment by its associated deadline.
Many credit card holders don't take the time to read up on fees, especially since they'll often get buried in pages upon pages of fine print. But if you're not careful, those fees could end up costing you a bundle, which is yet another reason to stay away from credit cards.
Of course, when used responsibly, credit cards do have their perks. As fellow Fool and personal finance expert Dan Caplinger points out, credit cards give you rewards for spending money on the things you'd already be buying, and they can be an effective means of managing your cash flow. The problem, however, is that most consumers don't have the self-control needed to reap these benefits without running into trouble. So if you have a history of overspending, do yourself a favor and limit yourself to debit cards and cash. Otherwise, you could wind up damaging your finances irreparably.