The Pros And Cons Of Credit Cards

Most Americans have at least one credit card, making them one of the most widely used forms of payment today. There are seemingly countless credit cards, ranging from starter cards designed to help people build credit to premium travel cards featuring bonuses, perks and rewards.

Though credit cards offer many clear benefits, they also carry some serious risks if not used responsibly. Whether you have several credit cards or you’re thinking of applying for your first card, understanding credit card pros and cons can help you shop wisely and safely.

Advantages Of Using A Credit Card

Credit cards are convenient and easy to use, and they may come with additional benefits or rewards, such as cash back, points or travel perks.

Convenience

Using a credit card is one of the most convenient ways to make a purchase, either online or in person. When you have a credit card, you never have to worry about bringing enough cash or juggling change. Most merchants accept credit cards as a form of payment, and you can make purchases of various sizes.

Safety

Credit cards are generally regarded as safer than debit cards since you can dispute unauthorized charges. A lost or stolen credit card can also be canceled, which makes credit cards a safer option than cash or checks. Most major credit card companies will also offer $0 fraud liability, which means the cardholder won’t be responsible for paying anything on fraudulent charges made to the card.

Meanwhile, federal law places a $50 limit on the cardholder’s financial responsibility for an unauthorized credit charge.

Cash Back, Rewards And Other Benefits

Most credit cards today offer cash back, rewards or other cardholder benefits. Credit cards may offer additional cash back on certain types of spending, or they may offer hotel or airline points you can use for travel. Some premium credit cards have additional benefits, such as complimentary access to airport lounges, exclusive events or statement credits for select purchases.

Easy Expense Tracking

You can access your credit card statements online from anywhere, making it easy to track your purchases and expenses. Whether you’re monitoring your personal finances or business expenses, credit cards can help you oversee and manage your spending.

The Opportunity For Credit Building

When you pay your credit card bill on time and use your credit card responsibly, doing so can increase your credit score and your overall creditworthiness. Building your credit is important because it will improve your chances of getting approved for a mortgage or other loans. Generally, the higher your credit score, the more likely a lender also is to offer you favorable loan terms.

Usefulness In Emergencies

Credit cards can be useful in emergency situations, particularly when paired with an emergency fund. Most credit cards also have a cash advance feature that allows you to borrow cash from an ATM if you’re in a pinch and need cash. Be aware, though, that when you take out a cash advance on your credit card, you’re borrowing money you’ll have to pay back with interest.

Cons Of Credit Cards

Like all other sources of funding, credit cards have some downsides, and you should carefully weigh them against the advantages that credit cards offer.

Let’s take a moment now to walk through the cons of credit cards.

High Interest Rates

Though some credit cards offer a 0% introductory interest rate, the interest rate on a credit card under normal conditions is much higher than the rate you’ll find with a number of other popular loan types. Even if you have excellent credit, your credit card interest rate might still be well above 20%. The average annual percentage rate (APR) for credit cards in 2023 was 22.8%.

The Risk Of Overspending

The convenience of credit cards makes it easy to pay for items you need and want, but this convenience can also make it tempting to overspend. Overspending can compromise your financial health and ultimately affect your credit score even if you consistently pay your credit card balance on time.

Annual Fees

Though many credit card companies don’t charge an annual fee, plenty do. The average annual credit card fee ranges from around $100 – $150, with several premium credit cards charging $500 or more each year. These fees are in addition to any interest charges or late-payment fees.

Fraud Risk

Unfortunately, credit card fraud is a common financial scam that’s only become more widespread in recent years. There are dozens of credit card fraud schemes, from card skimming and identity theft to phishing and hacking.

Credit Risk

While paying your credit card bill on time and maintaining a low credit utilization ratio can help you build credit, carrying a high balance or failing to make payments on time can damage your credit score and your overall credit profile.

Lack Of Acceptance By All Merchants

Though most merchants in the U.S. accept credit card payments, some merchants don’t. If you travel internationally, you might run into trouble using your credit card – particularly in countries sanctioned by the U.S. government or countries that don’t maintain diplomatic relations with the U.S.

Complicated Terms

Credit card agreements are often complicated, with confusing conditions and terms. Many credit card users don’t read the terms of their agreement, and those who do may find the fine print too confusing to understand.

Possible Difficulties Getting Approved For The Card You Want

If your credit history isn’t great or you have no credit history at all, it may be hard to get approved for the card you want. Many credit card providers require a minimum credit score of 670 – 700 for card approval, and some credit card companies may even require a score of 720 – 740 for approval on their premier cards.

Limits That May Not Be A Good Fit For You

Credit card limits may be too high or too low for some borrowers. A low credit limit can restrict your spending, even if you have the money to cover the purchase. Also, if your credit limit is low, purchases you make will increase your credit utilization ratio at a higher clip – which could hurt your credit score.

A credit limit that’s too high, on the other hand, could lead to overspending.

How To Avoid Credit Card Problems

If you want to get the most out of credit cards, it’s important to learn how they work. To avoid problems, be sure you understand the terms of your credit card agreement, make your payments on time and set up alerts to monitor your spending and prevent fraud.

Set Up Automatic Payments

Setting up automatic payments on your credit card is one of the fastest and easiest ways to avoid being late on payments. Your payment history is the most important factor in determining your credit score, and even one missed payment can cause your credit score to drop.

Automatic payments are a convenient way to save time, and they can help ensure you never miss your credit card payment due date.

Pay Your Full Balance Every Month

While you should always make your minimum credit card payment at the very least, it’s best to pay your balance in full every month. This way, you’ll avoid paying interest and potentially falling into a debt cycle. When you make only the minimum payment, you’ll pay interest on any remaining balance, which can be costly and harm your credit.

Know Your Limits

Keeping your monthly balance at only a fraction of your credit card limit will help you manage your spending and maintain your credit score. Make it a point to know your credit limit and how much you’ve spent, and – as much as possible – avoid approaching your credit limit.

Understand The Terms

If you have a credit card, you need to read and understand the terms of the card agreement. What happens if you miss a payment? What’s the card’s APR? Does the card charge an annual fee? If you’re having trouble understanding the terms, you can always call the credit card issuer for an explanation of your agreement.

Track Your Spending

Tracking your spending can help you better manage your finances and explore areas for improvement. It can also help you effectively manage your credit card account and be aware of any signs of suspicious activity or fraud.

Credit Card Alternatives

There are multiple options – two of which we’ll review next – for accessing money without applying for or using a credit card.

Home Equity Line Of Credit

A home equity line of credit (HELOC) gives you a revolving line of credit secured by your home. Your borrowing limit will likely be higher, and your interest rate lower, than what you’ll get with a credit card. A HELOC may not be approved for weeks, however, and because it’s a secured loan, you could lose your house if you fail to make timely payments.

Personal Line Of Credit

A personal line of credit is similar to a HELOC, but it can either be secured or unsecured (meaning it may or may not require collateral). Though you might enjoy a lower interest rate than you would on a credit card, you’ll start paying interest as soon as you borrow the money, and you may have to pay a fee every time you borrow.

The Bottom Line

Credit cards can be a great financial tool, but – as with other financial tools – you need to be aware of their pros and cons. Understanding the terms of your credit card agreement, paying your balance on time and carefully managing your spending can help you make the most of your credit card, establish a strong credit history and use your card with confidence.