Published 6:05 a.m. UTC Dec. 11, 2023
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A credit card can be a powerful financial tool.
If you use a credit card wisely, you can build up your credit scores and earn valuable rewards while avoiding unnecessary interest charges.
But, if you use a credit card the wrong way, you can wind up in a seemingly never-ending cycle of expensive debt, find yourself on the receiving end of stressful debt collection phone calls or even face legal trouble.
We’ll walk you through the pros and cons of credit cards and how best to avoid common pitfalls.
Pros and cons of credit cards
Having a credit card can feel like an invitation to spend free money. It’s important to remember this is not the case. Even though you don’t immediately have to fork over your own cash when you pay with plastic, your credit card payment will come due in the near future.
And, if you’re not careful to build responsible habits, the convenience a credit card offers can also come with a long list of potential drawbacks. Here’s what you need to know.
- Build credit history: Using credit cards responsibly helps you establish credit history and build up your credit scores, as most credit cards report your activity to the three major consumer credit bureaus. You can build good credit by making credit card payments on time each month and keeping your balance low. Good credit can help if you need a financial product such as an auto loan or mortgage in the future.
- Cover emergencies: A credit card can empower you to cover unexpected expenses when you don’t have cash readily available.
- Earn rewards: When you use a rewards credit card, you can earn cash back, points or miles, which can often be redeemed for things like credits toward your account balance, cash deposited into a bank account, gift cards, merchandise purchases or travel bookings. Some high-end cards also may come with complimentary benefits such as airport lounge access or credits for eligible purchases like travel or dining.
- Low payments: Unlike loans, credit cards don’t have a set payoff date for the full balance you owe, which means you have the option of repaying your purchases over a longer period of time through smaller, more affordable monthly payments. Just be aware that if you aren’t in a 0% intro APR period or paying your balance in full each month to take advantage of your card’s grace period, you’ll incur interest charges for carrying a balance.
- Security: Credit cards typically provide security features and protections for the cardholder. These may include a zero liability guarantee for unauthorized purchases, fraud alerts and/or credit score monitoring.
- Introductory offers: You may be able to earn a welcome bonus of cash, points or miles when you open a new credit card and hit a specified spending target, and some cards offer a 0% introductory APR on purchases and/or balance transfers for a limited period of time.
- High interest: Credit cards typically have far higher average interest rates than loans and most other financing, so the cost of carrying credit card debt can far outweigh any returns you’d get by putting your money into a savings account or investments.
- Debt accumulation: Credit cards give you quick access to money you don’t have, so they can tempt you to make purchases you can’t afford to pay off. Plus, if you fail to pay your full monthly balance, compounding interest charges will cause your debt to grow.
- Fees: Most credit cards have a variety of fees, which may include annual fees, late fees, foreign transaction fees and balance transfer fees. Some fees can be avoided by following good habits, such as always paying on time, or using a card with no foreign transaction fee when traveling abroad. But unwary consumers may find themselves paying more than expected when a fee hits.
- Confusing terms: Credit card terms can be complex, and some cardholders may struggle to fully grasp their implications. For example, cardholders may not realize that certain types of transactions — including credit card cash advances, balance transfers when you don’t have an intro period and money transfers sent through apps like Venmo — begin accruing interest immediately, while others don’t.
- Credit score requirements: If your credit scores are low, the credit cards you qualify for are likely to have higher-than-average APRs and fees and/or a low credit limit. Beware of subprime cards that may hit you with high annual fees and even additional fees like authorized user fees or credit limit increase fees. Instead, consider a good secured card to improve your credit score with through responsible spending and payment behavior.
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How to pick the right credit card for you
To choose the right credit card, start by getting clear on your goals for the card. Here are some common objectives you can achieve with a credit card, along with the types of cards that can help:
- Building credit: Secured credit cards, student cards and cards designed for people who are new to credit may be a good fit here.
- Earning rewards: Points or miles credit cards or cash-back credit cards can reward you for purchases you already make. Evaluate if you’re looking to score free or nearly free award travel with points or miles or if you’d rather keep things simple and get cash back you can redeem to your bank account or card balance.
- Managing debt: Credit cards that offer a 0% introductory APR on balance transfers or purchases can help you pay off existing debt from an old card or finance a new purchase you know is coming up soon.
Each credit card has its own fees and APR range, so be sure to compare those details before applying. You can find a summary of the card’s terms in the Schumer Box, which must be included in all credit card offers by law, and find any potentially obscured details by reviewing the credit card’s terms and conditions.
You can also get an idea of what credit cards you may qualify for by first getting preapproved for multiple cards and then comparing them to find the best credit card offer. Be aware that preapproval or prequalification does not guarantee you’ll actually be approved if you choose to submit an official application, it just means you have solid odds of approval.
How to use a credit card responsibly
As a general rule of thumb, avoid using a credit card for any purchase you can’t afford to pay off within 30 days. By sticking to this rule, you can avoid accruing interest charges and falling into a debt trap.
High APR got you feeling down? Here’s how you may be able to lower your credit card’s interest rate.
If you already have more credit card debt than you can afford to pay off right away, use any spare cash to pay off as much as you can as quickly as possible. At the very least, you’ll need to pay the required monthly minimum amount in order to keep your account in good standing, but paying more than the minimum payment helps you knock down the balance faster and reduces expensive interest charges.
You’ll also want to make a concrete plan for paying off your credit card debt in full, such as the debt avalanche or debt snowball method.
In addition to managing your balance on a credit card, you’ll also need to practice good security habits. That includes:
- Setting a unique and complex password for each online account where you use your credit card. Consider using a password manager if you have a lot of accounts so you don’t get overwhelmed having to remember a different password for each one.
- Regularly reviewing your credit card statements and your credit reports for incorrect charges and signs of credit card fraud and identity theft.
- Only using your card to make transactions with legitimate vendors. If a deal seems too good to be true and you’re not familiar with the merchant, exercise caution.
Do you know what “skimmers” are? Here’s how to spot a credit card skimmer and hopefully avoid fraudulent charges.
Frequently asked questions (FAQs)
Having a credit card can be either good or bad, depending on how you use the card. If you cover at least your minimum payment on the card each month and keep your balance low, having a credit card can help you build up positive credit history.
But if you carry a large balance from month to month, you can get stuck in an expensive debt cycle. Even worse, if you fall behind on payments you can face late fees, an increased penalty APR, damage to your credit scores and even legal action.
In some ways, credit cards are safer than cash and debit cards. They typically have better stronger security features to help protect you from losses. For example, cardholder losses are generally limited to $50 for fraudulent transactions, and you can request a credit card chargeback if you’re charged for a product or service you didn’t receive.
However, be careful not to let a credit card tempt you into taking on high interest debt. The ease of using a credit card to borrow money can make it feel like you have more spending power than if you paid with cash or saw the money immediately leave your checking account.
Some credit cards have annual fees. Typically cards with ample rewards and/or luxury benefits have the highest annual fees, but you can also find many valuable rewards credit cards that charge no annual fee.
The minimum payment on a credit card is the minimum amount set by the issuer that you are required to pay each month in order to avoid penalties. Even if you pay some money to your creditor, if it’s less than the minimum payment amount, you can face a variety of penalties — including late fees, an increased APR and damage to your credit scores.
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