Posted by Mike Smith :: June 18, 2008 @ 9:05 am

Even though I’ve opted out of pre-screened credit cards, I still get offers from time to time. They generally come from a company with whom I already have an established relationship, such as a bank or airline. When I see these offers, the terms remind me of just how expensive credit cards can be.

You often see the dangers of using credit cards to pay for small purchases mentioned by those who give financial advice. They show how the interest can make something like a trip to McDonalds become incredibly expensive if your balance isn’t paid off in full each month. While it’s true that you don’t want to end up paying $20 for an Extra Value Meal, running a balance on larger purchases is even more damaging. The interest you pay on a large balance is obviously even greater.

If credit cards are harmful for small purchases, and especially for large ones, what are they good for? Convenience is one reason I favor my credit card. It’s easier and faster to swipe my card than carry cash and receive change. Another reason that people use credit cards is to pay for things they cannot afford. While this is certainly a valid use, social lending sites offer a much more affordable option. Financing a large purchase with a P2P loan versus using a high interest rate credit card could literally save you thousands of dollars in interest over the life of the loan.

The only situation where I believe credit cards serve a good purpose is when they are paid off in full each month. That offers convenience, helps to build your credit history, and may qualify you for cash back or other rewards, without incurring the negatives associated with credit card use. If you are unable to pay off your balance each month or have a large upcoming expense, a peer-to-peer loan will likely be a much smarter way to go.