The Pros and Cons of Credit Cards

October 27, 2022
The Pros and Cons of Credit Cards

As with any financial tool, credit cards come with both benefits and drawbacks. While it’s easy to get excited about the convenience and perks credit cards can provide, it’s also important to be aware of the potential risks of overspending and high interest charges. To determine whether using credit cards is the right move for you, we’ve taken a look at the advantages and disadvantages and how they might impact you and your financial well-being.

The Pros of Using Credit Cards

There are a lot of reasons to consider using credit cards in your everyday life. Here are some of the more prominent benefits of using credit cards that can add value to your financial life.

Pro: They’re convenient.

There was a time when cash was king, and it was difficult to use credit cards. Now, the opposite is true. If you use a credit card for a good chunk of your spending, you don’t have to worry about always having cash on hand, and you can even add your card to a digital wallet for additional convenience. And if you travel, you don’t have to worry about finding an ATM as long as the local merchants accept your card’s payment network.

Pro: They’re a good way to build credit.

One of the keys to building solid credit is a history of on-time payments, and prudent use of a credit card is an easy way to do that. In fact, if you use a card for modest purchases each month, keeping your balance relatively low compared to your credit limit, and then pay off the balance in full by your monthly due date, you can build credit without paying interest charges.

Pro: Rewards and perks.

Many credit card companies frequently offer rewards with every purchase you make, or on certain types of purchases. Depending on the rewards program, you could get cash back, or you could earn points or miles, which you could redeem in a variety of ways, such as travel, gift cards, online shopping and more. Some cards also offer sign-up bonuses to new cardholders after you meet a minimum spending requirement. You might even receive additional perks, such as cell phone protection, travel insurance, travel or dining credits, and more.

Pro: Fraud protection on unauthorized charges.

Most major credit card issuers offer zero-liability protection on unauthorized charges. And if you spot and dispute unauthorized charges before you pay your monthly bill, that money won’t be coming out of your bank account (as long as the dispute is upheld). Also, credit card technology has improved to the point where if you use your card’s chip or tap to pay, the transaction is encrypted to help prevent hackers from stealing your card information.

Pro: You can track your spending.

If you love keeping track of where your money is going, you can get real-time insights into your spending through your credit card’s online account or mobile app. Many card issuers even categorize transactions by type — dining, groceries, entertainment, etc. If you check your transactions regularly, you’ll better understand where your money is going and can make adjustments to your spending when necessary.

The Cons of Using Credit Cards

While there are some clear benefits to using credit cards, there are also some inherent risks that can damage your credit and threaten your financial well-being. Here’s what to consider.

Con: Risk of spending beyond your means.

In a 2021 MIT study researchers found credit card users tend to spend more than cash users. If you’re prone to overspending, you could end up spending more than you can afford to pay back. If that continues over time, you could also end up with some expensive debt.

Con: High cost of borrowing.

Credit card debt can be expensive. The average interest rate on a credit card currently stands at more than 18%, according to the Federal Reserve, but some cards charge up to 36%. And if you don’t pay your balance in full every month, you could lose your grace period, which means that interest starts accruing for each purchase on the transaction date. What’s more, carrying credit card debt from one month to the next can not only neutralize any other value you get from your card, it may also limit your opportunity to achieve your other financial goals and/or meet your day-to-day financial needs.

Con: There are a host of fees.

You can avoid credit card interest if you pay your bill on time and in full every month. But many cards also charge a host of fees. Be careful to be aware of and understand any fees that may be associated with certain credit card services, like balance transfers or cash advances. And remember, late fees are avoidable if you pay your bill on time.

Additionally, confirm whether the credit card charges an annual fee. You’ll need to make sure you can get enough value through rewards and benefits every year to make that fee worth the cost. If you have great credit, it’s relatively easy to avoid annual fees, particularly if you focus on cash-back credit cards. But consumers with poor or even fair credit may have a harder time getting a no-annual-fee card, and most travel credit cards charge annual fees ranging from just under $100 to several hundred dollars.

Con: Usage can impact your credit scores.

How you use your credit cards plays a large role in your credit score calculations. In particular, your credit utilization rate is one of the most influential factors in your FICO score. This rate is calculated by dividing your card’s balance by its credit limit, and it’s done for each individual card, as well as for all of your accounts. For example, if you have a $2,500 balance on a card with a $10,000 limit, your utilization rate on that card is 25%. And if you have three credit cards with a combined balance of $6,000 and a combined limit of $15,000 limit, your utilization rate for all accounts is 40%.

Some credit experts recommend keeping your utilization rate below 30%, but there’s no hard-and-fast rule. The lower it is, the better. If your utilization rate gets too high, it could negatively impact your credit score until you pay down the balance. This can even be true if you pay your bill in full every month, so keep an eye on your balances and consider using your cards less or making multiple payments throughout the month to keep your utilization rate low.

What Else to Know When Considering Credit Cards

When used responsibly, credit cards can provide a lot of value, and you may even be able to avoid some or all of the potential drawbacks. But if you’re concerned about going into debt or paying unnecessary fees and interest, they might not be worth it. As a result, it’s important that you take the time to consider why you want a credit card and how using one might affect your financial well-being.

For example, while a big travel sign-up bonus can help cover the cost of your next vacation, it might not make sense if you end up paying a lot in interest because you sometimes struggle with overspending. But if you regularly use a budget to manage your spending, you could potentially avoid that cost by spending within your means.

Think carefully about your situation, spending habits, and preferences to determine the right path for you. Spend time considering if a credit card is a financial tool that makes sense for you. Evaluating which lender you would like to work with, the types of perks you would like, and how credit cards can help move you toward your financial goals is a key part of making the right decisions for your wallet.

The Bottom Line

Like most financial tools, credit cards aren’t inherently good or bad. Used properly, they can help you build a strong credit profile and give you access to appealing perks and rewards. On the other hand, they can lead to overspending, excessive interest charges, and potential damage to your credit score.

If you decide to use credit cards, be mindful of your usage and diligent about reviewing your spending. Your vigilance can help you enjoy the benefits while limiting the risks. And If you’ve built up more debt than you can handle, a personal loan can help you consolidate your credit card debt and save you money on interest over time.

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