A credit card is a convenient financial product that can be used for everyday purchases such as gas, groceries, and other goods and services. It can also be a great resource for purchasing big-ticket items such as TVs, travel packages, and jewelry. The funds for these items are not always immediately at our disposal.
If you’re wondering whether a credit card is a right option for you, it might not always be a straightforward decision. They can offer some benefits depending on how you use them, but like any borrowing, they also present a risk if you can’t pay back what you owe.
What Are the Benefits of Using a Credit Card?
We’ve set out the basic benefits and disadvantages of using credit cards, so you can make an informed decision on whether or not you should apply for one.
Build your Credit History
Credit scores, taken from records of your financial activity, are essential if you plan to borrow money. These scores come partially from your credit card history.
Credit card use is reported to the bureaus that monitor scores. A track record of paying a credit card balance on time helps your score immensely. And the longer you use credit cards, the more you’ll build your credit history, improving your score even more.
Get Cashback Benefit and Reward
Credit cards can be valuable tools for earning rewards, traveling, handling emergencies or unplanned expenses, and building credit when used responsibly.
When you make purchases on cashback credit cards, you earn a small amount of money back. The cash reward can be anywhere from one to six percent of your purchase total. Over time these rewards can add up to a sizable bonus. There are almost as many rewards programs as there are cards. The trick is to find a rewards program that fits with spending habits you already have or partners with a retailer you already like.
A rewards credit card rewards the cardholder for making purchases. Rewards can vary by issuer and card type. Some rewards come in cashback, discounts on gas station purchases, and even travel miles. For those who use their cards regularly, earning rewards is one of the primary advantages of credit cards, as cardholders can redeem them for things they were going to purchase already as well as the occasional treat.
Credit cards can also be beneficial when traveling. Some major car rental companies and hotels require a hold on a credit or debit card to reserve a vehicle or book a room.
Help You Track Your Spending
Want to budget better? Credit card statements are a built-in expense tracker. Your purchases get recorded online with all the essential information—where, when, how much, and how often you’re spending. Some card companies keep your spending records around for years.
This benefit becomes especially useful to come tax time. With one record of the past year’s spending already compiled, you’ll save time and effort on your taxes. Business expenses, rental property expenses, charity contributions, and trickier tax return areas show up on a credit card statement.
They Protect You from Fraudster
Say your credit card is stolen, or someone finds your card information online. Even if the thief starts making purchases on your card right away, you won’t lose much money since charges to credit cards aren’t withdrawn immediately.
Some credit cards offer fraud alerts to serve as a safety net if you experience theft of their card or information when traveling. In the case of potentially fraudulent activity, an alert may be sent via a phone call, email, or text message, and the transactions can be stopped.
Once you notify the card company of the theft, they’ll put a hold on your card and investigate. You aren’t liable for any fraudulent purchases made in the meantime. Federal law protections for credit card holders keep you from losing much cash. The most you’ll potentially be liable for is $50. And if you report before a purchase is made, or if your credit card company has a zero-liability fraud policy, you won’t lose anything.
Have Purchase Protection
Consumer protection is a huge perk of many credit cards. If you buy an item with a credit card and later find out it’s damaged or the quality is poor, you can return the item and get the charge removed. This is because any purchase you make between $100 and $30,000 on credit is protected.
Credit cards may offer extended warranties on electronics, furniture, and other items you hope to use for a long time. In many cases, the card doubles the time on the manufacturer’s warranty. Make sure to keep your receipts!
If you need to make a purchase but you’ve not saved up enough yet, some credit cards offer a 0% interest period that effectively lets you borrow for free – providing you make your monthly payments. Even if you pay the minimum amount required per month, you’ll still be borrowing interest-free until this period ends. At this point, it would be best to pay off your debt completely; otherwise, you could be placed back on the provider’s standard interest rate – which can be quite high. You might also be placed back on the standard rate if you miss a payment or exceed your credit limit.
Buying now to pay later
It can also be a more convenient option to use a credit card, as it can let you buy a product or service but not pay for it until payday rolls around. Because you may not have the necessary funds in your bank account, credit cards increase your purchasing power, providing you with the required funds at the time they are needed.
Disadvantages of using a credit card
When you use a credit card, you should be mindful of the following risks:
The possibility of debt
The main risk of taking out a credit card is that you could put yourself in rising debt if you cannot pay back what you borrow. Credit card providers can charge high rates of interest because you have a poor or limited credit history (as you’ll present a higher risk) or because the card offers certain extra features. Sometimes the interest rate can be over 20%, which builds up quickly if you don’t pay the balance.
Your credit score
Letting your credit card debt build up or missing payments can influence your credit rating. The lower your credit rating, the harder it will be to apply for credit in the future.
Credit cards can also come with charges if you don’t meet your repayments or exceed your credit limit.
4. Limited usage
You might be restricted in how and where you can use your credit card. For example, many will charge you for withdrawing cash or using the card abroad unless stated otherwise in the credit agreement.
How Do I Use Credit Cards Responsibly?
Like most financial products, the advantages of credit cards are best enjoyed when cards are used responsibly. It is essential for anyone who decides to open a line of credit to consider how they plan to make the payments and how to use their newfound purchasing power responsibly.
It can be beneficial to use a credit card for purchases that allow the balance to be paid off within a reasonable time frame. If there is no plan to pay off the balance, however, it will likely continue to accumulate interest, reduce spending power and potentially limit the benefits of having a credit card. You may be able to calculate the interest and payoff time of any credit card with online tools, like the Credit Card Interest Calculator from Discover. A good rule of thumb for using credit cards responsibly is not to use them for impulse purchases or unaffordable items if you cannot pay them off within a reasonable amount of time.
How can you use your credit card effectively?
To make sure you’re getting the best from your credit card, consider the following:
- Get a card to match your needs: You should consider what you’ll be using your credit card for before applying. There won’t be much point in paying extra for an air miles credit card if you don’t fly a lot, and if you’re in a lot of debt, it’s worth considering balance transfer cards more than store or supermarket cards.
- Don’t miss a payment: Missing payments can result in charges and loss of certain benefits, making it important to keep up with your balance – even if it means paying the minimum monthly amount.
- Pay more than the minimum: It’s usually better to pay off as much as you possibly can, ideally the full amount. This can help you keep control of your balance and avoid going into debt.
- Set up a direct debit: If you think you might not remember to make your payment each month, you could try setting up a direct debit for the minimum monthly amount to ensure you can at least meet that payment
- Set up text alerts: You can also set up free text alerts that will remind you when a payment is due or when you are approaching your credit limit
- Please take advantage of rewards: Credit card rewards can be a great bonus of your credit agreement, but as they can sometimes cost extra, you should take advantage when you can; otherwise, you’re paying for a service you don’t use
- Time your applications: Applying for a credit card can leave a mark on your credit report, and too many of these are generally an indicator of poor finances.
Choosing a credit card
Understanding the benefit and disadvantages of credit cards should help you decide what kind of credit card you would like.
Examples of some questions to ask yourself include: Do I want to…
- Did it help spread the cost of my spending?
- Build my credit score?
- Pay down my existing debt?
- Get cashback and rewards?
- Spend fee-free when traveling abroad?
Answering these questions first will help when you look at the different features a credit card offers.
If you are looking to simplify your payments, the best option may be to find a card with all of the desired features (e.g., cashback, no annual fee, etc.).
Deciding on a credit card should be given as much consideration as any other financial decision. Cards vary by issuer and type, so what works for one person may not be the best option for another.
For someone who frequently travels for business or pleasure, a travel or miles card offered by credit card issuers could be a good choice. Some cards offer cashback on daily purchases and enhanced rewards that can be activated in specific categories up to a maximum that rotates every quarter. For students, there are often special credit cards with programs designed for someone beginning their financial journey.