Credit cards can be a powerful financial tool with a lot of benefits if used responsibly. But for some people, they can lead to debt, financial distress, and desperation.
Before you start using credit cards, it’s important to understand the benefits and drawbacks of having that piece of plastic in your wallet. In some cases, using one or more can help you take advantage of rewards and other benefits. But in others, it might be best to avoid them altogether.
To help you decide for yourself, here’s a list of the pros and cons to consider before using credit cards in earnest.
7 pros of credit cards
In the right scenario, you can get a lot of benefit out of using a credit card. Here are seven benefits in particular:
1. Convenience
Having a credit card in your wallet means you never have to worry about having cash on hand to make a purchase. You can also shop online, book a hotel or rental car, and even get cash through a cash advance.
2. Can pay off in full or over time
It’s recommended to pay off your credit card balance in full each month to avoid interest. But if you need it, you can pay down your debt over time, usually with a low minimum payment. This can be beneficial if your budget gets tight unexpectedly.
3. Can improve your credit
Using a credit card responsibly and paying it off in full each month can help boost your credit score. Your payment history makes up 35% of your credit score and your credit utilization — your balance divided by your credit limit — helps make up another 30%.
4. Credit card rewards
Many credit cards offer rewards on everyday purchases, and some even provide sign-up bonuses to entice you to apply. Rewards typically come in the form of cash back, gift cards, and travel points and miles.
The more you use your credit card, the more rewards you earn, and you can use your accumulated rewards to book free travel or use it for everyday purchases.
5. You may get free financing
Some credit cards offer introductory 0% APR promotions on purchases, balance transfers, or both. Depending on the card, you could get up to almost two years to pay off a balance entirely interest-free.
Even if your credit card doesn’t have a 0% APR promotion, you’ll typically get a grace period of at least 21 days between your statement date and your due date, where you won’t get charged interest if you pay off your balance in full.
6. Fraud protection
Federal law allows credit card companies to hold cardholders liable for up to $50 if someone uses your credit card fraudulently. But many card issuers go above and beyond that requirement, offering zero-liability protection.
What’s more, if your credit card does incur some fraudulent purchases, it’s the credit card issuer’s money instead of yours that’s been stolen.
7. Other benefits
Many credit cards provide cardholders with several other benefits, including shopping and travel protections and travel-related perks.
7 cons of credit cards
While it’s easy to focus on the benefits of using a credit card, not everyone can take advantage of them without dealing with some of the drawbacks they carry. Here are seven to think about.
1. Temptation to overspend
Credit cards allow you to spend more than you have in your bank account, which can cause problems if you can’t manage to pay off your balance in full each month. Studies have shown that credit card holders are generally willing to spend more than people who use just cash.
2. They charge interest
The average credit card charges 15.54% in interest, according to the Federal Reserve. And while you can avoid paying it if you pay your balance in full each month, it can add up quickly if you carry a balance.
3. Some activities come with higher interest rates
If you take out a cash advance with your credit card, you’ll typically pay a higher interest rate, plus a transaction fee. What’s more, cash advances typically don’t have a grace period, so interest begins accruing immediately.
If you fall behind on payments, you may have to pay a penalty APR, which can be upwards of 29%.
4. Many credit cards charge fees
Depending on the card you get, you may have to deal with various fees. Examples include an annual fee, cash advance fees, balance transfer fees, foreign transaction fees, late fees, and more.
5. Terms can be confusing
When you get a credit card, it typically comes with a small booklet containing your credit card agreement. There are a lot of terms and conditions that apply to your card, especially if it offers rewards or other perks.
If you’re not a pro, it can be confusing trying to figure out the fine print.
6. Misuse can damage your credit score
If you miss a payment or rack up a high balance on your credit card, it could hurt your credit score instead of helping it.
7. The potential for credit card fraud
While many credit cards offer zero-liability fraud protection, you still have to deal with the fallout of a fraud case. Identity thieves target credit cards from all angles, so it’s important to stay vigilant.
Are credit cards worth it?
It’s important to know both the pros and cons of credit cards before using them, but don’t let the downsides scare you right away. It’s possible to use credit cards responsibly and to avoid many of the drawbacks they pose.
At the same time, it’s also acceptable to choose not to use credit cards to avoid the dangers altogether. Consider how you feel about credit cards for yourself before choosing one.
