While you may not realize it, your credit cards can be a double edged sword both giving you options and putting you in jeopardy. The benefits often outweigh the risks but you should be aware of all sides of the matter in order to best decide how you fit credit cards into your own monthly spending plan.

There are many good points about credit cards but the most obvious are:

• Instant funds available in an emergency
• Tracked spending (your monthly statement)
• Reports are sent regularly to credit reporting agencies
• Online shopping
• Automatic payments

Risks of Credit Cards

There are risks involved in almost everything. If you use credit cards these are common risks for you:

• Overspending
• High interest on large debt
• Identity theft
• Reports are sent regularly to credit reporting agencies (this is both a benefit and a risk depending on your credit score and how reliably you make your monthly payments)

Generally the very biggest problem for Americans who use credit cards is overspending. Just because they have a card in their pocket they often feel that they can afford to purchase anything they want. The instant gratification of shopping can be overwhelming and the real monthly budget simply flies out of their heads. This can mean that astronomical debt can be created almost instantly and while it is easy to acquire this debt can take years and years to get rid of. Once you have maxed out your credit cards and accepted new credit card offers and maxed them out you may find yourself in a very bad position.

Simply making the minimum payments on all your debt can stretch your budget to a breaking point and you will be accumulating more debt each month because of the high interest rates charged by the banks and credit card companies. Minimum monthly payments will NEVER get you out of debt. You may find that the minimum payment due is equal to amount of interest that goes onto the account each month and that means you are now in a crippling financial situation.

This is a situation that you could very well have avoided by not overspending on your credit cards. Your credit score can begin to suffer as well because your income to debt ratio is now very high. You risk something else that is very important when you overspend with your credit cards. You risk not having access to any funds in an emergency situation.

Everyone encounters emergencies now and then throughout their lives. Imagine that you suddenly need to fly across the country for a family emergency but you have maxed out all your credit cards on electronics, shoes, toys and clothes? What will you do? What if you or someone in your family has a medical emergency that is not covered by your health insurance? You cannot pay for it because you maxed out your credit cards on other things and did not leave yourself any room for emergencies. This is a serious mistake in how you handle your finances. Everyone should make sure they have a credit card with room on it for unexpected events, especially if they do not have a savings account for emergencies.

Identity theft is very common now and is often perpetrated by criminals using credit cards. They apply for credit in your name and charge up as much as they can under your name. This is one of the risks of credit cards and it can happen when you give out personal information or are not careful to destroy financial documents when you get rid of them. You can monitor this risk very closely however, by checking your credit report once or twice a year in order to make sure there are not accounts that have been opened in your name without your knowledge or permission.

Risks For Credit Card Companies

You are not the only one in this equation who is subject to some risk. The credit card companies and banks also have risks. Whenever these institutions give you unsecured credit card offers they are risking loss. The size of the risk is mostly dependant on your credit score. If you have excellent credit, the banks risk less by giving you a Visa, MasterCard or other credit card because you are most likely to make your payments in a responsible manner. Credit card offers for bad credit risks are still made but the banks and credit card companies usually offer higher interest rates to these people. This is so that they protect themselves from losing money on those with bad credit or only fair credit. Once good credit has been established, the very same institutions will often make credit card offers that are much more attractive.

It is About Credit Card Balance

Just as in many things in life, credit cards work best when they are balanced with good judgement and good financial planning. Making a monthly budget and figuring out where your credit card debt goes in that plan is an excellent way to take charge of your financial world and prepare yourself for the future. Make sure you have a plan for where emergencies will be funded if they occur and keep that credit card open for them. Take charge of your shopping habits and make sure they are in the budget.

Balance the benefits of your credit cards with the risks and always have a plan.