Using a credit card is one of the best ways to improve your overall financial situation by boosting your credit score and earning rewards.
When you’re approved for a credit card, the card issuer gives you a line of credit. At the end of each monthly billing cycle, you’re required to pay off that balance or interest will start accruing.
High interest rates and how quickly they can add to your debt balance are downsides to credit cards, but you can also enjoy benefits like rewards and a higher credit score if you pay off your balance in full and on time.
Here are some advantages and disadvantages of credit cards to keep in mind when deciding whether to get one.
Pros and Cons of Credit Cards
When used responsibly, the best credit cards offer benefits and convenience, but they also come with risks. Let’s take a look at the pros and cons of credit cards.
Strong Points
- Allows cardholders to build credit over time through responsible usage
- Offering opportunities to earn rewards
- Travel benefits available
- Strengthening consumer protection
- Provides protection against theft and damage to your purchase
- You may receive a 0 percent introductory APR offer as a way to pay off debt or make a large purchase.
Cons
- Interest rates tend to be higher than other loan products
- Charge possible fees, including unavoidable ones
- It tempts you to overspend and get into credit card debt.
- There may be costly late payment promotions
- It could negatively impact your credit score
Benefits of Credit Cards
The following credit card benefits can help you get even more value from your card.
Credit-building opportunities
Credit cards can be a tool to help you build credit over time, and your credit score can have a big impact on your financial life.
Having good credit can help you get a leg up when applying for future loans like a car loan or a mortgage. A high credit score can also help you get better terms (like a lower interest rate) on the money you borrow.
The best way to use a credit card to build credit is to pay at least the minimum on time each month and keep your credit utilization ratio low. Card issuers regularly report your account activity to the three major credit bureaus, so you need to consistently build a good history.
“Using your credit cards responsibly will help build your credit profile,” says Kyle Enright, president of Achieve Lending, a personal loan and mortgage-backed lender. “That means keeping fees low and paying all your bills on time.”
Enright points out that unlike credit cards, debit card usage doesn’t count towards your credit score, so the best way to build credit is to use your credit card.
Rewards
Having the right credit card in your wallet can help you earn cash back, points, or miles on common purchases. Opening a rewards credit card can even give you a welcome bonus once you reach a certain spending threshold.
But before you choose the card with the highest welcome bonus or rewards percentage, you should first consider which credit card best suits your spending habits. For example, frequent travelers might benefit from a travel credit card that offers points or miles to redeem for future trips. Other shoppers might be better served by a cash-back card that offers points on categories like groceries, gas, and entertainment.
Travel Rewards
Some credit cards offer additional travel benefits that can be of great help on your next trip. These include:
- Travel Insurance
- No Foreign Transaction Fees
- Lounge access
- Statement credits for programs such as Global Entry and TSA PreCheck
- Save with our partner brands
“Credit cards are a great way to travel,” says Enright. “Car rental companies, airlines, and accommodations usually prefer credit cards because it’s easier to claim damages with them than with debit cards. Plus, if they accept debit cards, they may place a hold on the associated checking account, meaning you can’t access the money until the hold is released.”
Fraud Prevention
Consumer credit card protection makes everyday purchases with a credit card a safer option than cash.
“If you purchase something with a credit card and need to dispute the transaction for any reason, you can contact your card issuer to report it,” Enright says. “You will not be responsible for the charges while your card issuer is investigating the transaction.”
Most credit cards come with zero liability fraud protection for unauthorized charges as long as you report the charge within 30 days. Even if your issuer doesn’t offer zero liability, the Fair Credit Billing Act limits your total liability for fraudulent charges to $50.
Additionally, if fraudulent charges have been made to your credit card account, you may be able to resolve the issue before the balance is paid and money is actually lost. However, if your debit card has been stolen, it may take longer to resolve the issue as you will have to wait for the funds to be credited back to your bank account.
Plus, “credit cards allow you to avoid carrying large amounts of cash,” Enright says — and if that cash is stolen or lost, it’s probably gone forever.
Purchase Protection
Purchase protection is another hidden perk offered by most credit cards: if an item you buy with your card is stolen or damaged within a certain period of time (usually 90 to 120 days), you’ll get a replacement or a refund.
Keep in mind that this bonus usually has annual or lifetime limits, as well as per-claim limits, and may exclude certain types of purchases, such as cars, antiques and used goods.
Discontinued Potential Conflict of Interest
Some credit cards also offer a 0 percent introductory APR, allowing cardholders to waive interest on eligible balance transfers, new purchases, or both during the promotional period (usually 12 to 21 months). If used properly, the best 0 percent APR cards can help you pay off high-interest debt or make a big purchase over the long term.
Enright recommends paying off your balance in full before the introductory period ends, after which interest rates are likely to rise sharply.
You don’t want to end up drowning in more debt when your introductory offer ends, and if you don’t make the minimum payment, the issuer may cancel the promotional interest rate and charge you a high penalty APR.
Disadvantages of credit cards
Although credit cards can add value to your spending, there are also risks associated with using them. Here are some disadvantages of credit cards:
High Interest Rates
Credit cards have notoriously high interest rates: Currently, the average interest rate on a credit card is just over 20 percent, but some cardholders are charged a higher APR.
Most credit cards have variable interest rates that change over time, usually based on changes in the government’s prime rate. If you carry a balance on your credit card, you’ll pay interest on that balance. And because interest compounds until the balance is paid off, it can add up quickly.
“Paying less than your balance means paying higher interest. Not only will you be paying actual interest, but you’ll miss out on the opportunity to do something productive with that money.”
Kyle Enright
President of Achieve Blending
Fee
Interest isn’t the only cost you may incur with a credit card. Card issuers may charge late fees, foreign transaction fees, balance transfer fees, etc. Be sure to read your card’s terms and conditions to find out what fees you may incur and how to avoid them.
Many premium credit cards also charge an annual fee, which you pay each year for the privilege of having the card. Often this cost can be offset by the value you get from the perks and rewards, but make sure it’s within your budget before you sign up. You might also consider a credit card with no annual fee.
Debt Risk
Having a high credit limit can be tempting to overspend, but with high interest rates, overspending can come at a big cost.
If you have a tendency to overspend, create a budget that allows you to spend only what’s left in your bank account and pay off the balance at the end of your billing cycle. Then track your spending throughout the month to make sure you stay on track.
You can avoid the pitfalls of credit card debt by only spending what you can pay off in full each month.
Late payment interest
Some co-branded or store cards offer rewards for shopping with certain stores or brands, promising zero-interest loans for the promotional period. But don’t confuse these rewards with 0 percent APR credit card offers. Issuers record interest on your purchases from the moment you receive the card. If you don’t pay in full by the end of the promotional period, you owe the full amount, even if you only have $1 left to pay.
Look for phrases like “no interest if paid in full” or phrases that promise no interest for a set period of time to spot late interest promotions. Missing these tips or not paying in full before the promotional period ends could cost you dearly.
Risk of a lower credit score
There are many ways to build credit with credit cards, including developing a good payment history, keeping your credit utilization ratio low, and improving your credit mix, but bad credit habits can also lower your credit score.
For example, having a higher than ideal credit utilization ratio can negatively impact your score. Experts recommend using less than 30 percent of your available credit. If your credit limit is $5,000, that means keeping your balance below $1,500.
Applying for multiple credit cards at once can also temporarily lower your score through hard credit inquiries, and multiple recent credit applications can also be a red flag to lenders.
Of course, late payments or not making the minimum payment will also lower your credit score. “If you have high balances and your payments aren’t always made on time, your credit score will drop,” warns Enright.
Conclusion
Credit cards can be a great financial tool if used wisely. Not only can you build a good credit history, but with the right card, you can earn points on everyday spending and get value from extra perks. But keep in mind that using a credit card can also have its downsides. Using a credit card can put you more easily into debt, which can add to your costs and ultimately hurt your credit.
If you’re ready for a new card and feel like you can manage all of the pros and cons of credit cards, you can use Bankrate’s CardMatch tool to get pre-qualified for multiple cards and find the one that’s best for you.
