Pros and Cons of Credit Cards

Are credit cards a helpful financial tool or a dangerous one to avoid? You may have heard scary stories and warnings about credit cards, but there are pros and cons you should be aware of. Here, we'll break them down.

The benefits of using credit cards

Once you get the hang of using them, credit cards offer many benefits.

Rewards for the purchases you're already making

When you charge expenses on a credit card rather than using a debit card or cash, you get rewarded for those purchases. Those rewards could come in the form of points you convert to hotel stays or store gift cards. Or they could come in the form of actual cash back that can offset the cost of your purchases. And the higher your credit score, you're likely to qualify for better rewards cards.

A convenient way to shop

If you have a credit card at your disposal, there's no need to worry about having enough cash on hand to cover your purchases. Not only are credit cards convenient in this regard, but they can help you avoid costly ATM fees.

Help building your credit

When you pay your credit card bill on time, that activity gets reported to the credit bureaus that compile the information in your credit report (Equifax, Experian, and TransUnion). And a strong payment history could help your credit score increase.

Similarly, keeping the same credit card accounts open for a long time can help you build a solid credit history, which can also help your credit score climb. The higher your credit score, the more borrowing options you'll have. Along these lines, if you need to build credit quickly, getting added as an authorized user on someone else's credit card account is a good way to do so.

Flexibility in covering your expenses

When you charge expenses on a credit card, you don't need to pay your entire credit card bill by the end of your monthly cycle. Rather, you're only required to make your minimum monthly payment. As long as you make that minimum payment on time, you'll be reported as current on your account.

Granted, carrying a balance on your credit card has other consequences, like racking up interest charges, but you do get that leeway. If an emergency expense pops up and you don't have the money in your bank account to cover it, you can pay it off over time by putting it on your credit card.

Purchase protection

When you buy something using a credit card and the product ends up being defective, you get more protection than you would if you had paid in cash. If the merchant won't make things right or issue you a refund, you have the option to dispute the charge with your credit card company so you're not out the money.

Coverage for travel-related hiccups

Things can go wrong during travel, from lost luggage to flight delays. In addition to perks like air miles, hotel points, and free checked bags, many travel reward credit cards offer protection for these and other snags.

Help in tracking spending

When you pay for purchases in cash, it can be difficult to remember how much you've spent, and where that money has actually gone. The upside of using a credit card for everyday purchases or large purchases alike is that you can track your spending in your credit card account and make sure you're not going overboard.

The drawbacks of using credit cards

While there's much to be gained by using a credit card regularly, there are drawbacks you should know about as well.

Hefty fees

Your credit card company might charge a host of fees that could really add up in the course of the year. Some cards come with an annual fee that can range in price (though it's worth noting that annual fee credit cards often offer superior rewards programs). Additionally, you could face costly late payment fees if you forget to pay your bill on time or can't make your minimum payment on time.

Interest charges

Credit cards are notorious for charging high interest rates. That said, the interest rate on yours will depend on factors like your credit score. But if you carry a balance forward, you could end up spending a lot of money on interest.

The potential to overspend

Each time you open a new credit card account, you're given a credit limit that dictates how much you can charge. But your limit may be higher than what you can actually afford to spend, and that could open the door to overspending. And once you land in credit card debt, it can be difficult to get out of it.

Credit score damage

Using credit cards can hurt your credit score in a number of ways. First, if you're late making your payments, that negative activity will end up on your credit report, thereby dragging your score down. Also, having too high a balance can hurt your credit score by raising your credit utilization ratio. That ratio measures how much of your credit limit you're using at once, and the higher that number, the more your credit score can suffer.

The potential to fall victim to fraud

It's always possible for a criminal to get a hold of your credit card number and use it to make unauthorized charges. The good news is that as a consumer, you're protected from financial losses due to credit card fraud. But you'll need to be vigilant and stay on the lookout for fraudulent charges on your account. And if you spot any, you'll have to contact your card issuer to file a dispute.

The bottom line on credit cards

Credit cards can make it easier to manage your money while also rewarding you financially for the purchases you're making. But it's also important to understand the drawbacks of being a credit card user.

If you're going to use a credit card, be sure to follow these rules:

• Don't rack up a balance you can't pay off by the time your credit card bill is due unless it's a true emergency.
• Don't be late with your minimum payments, as that could damage your credit score.
• Always read the fine print on your credit card agreement, so you know what you're signing up for.
• Don't pay an annual fee for a credit card unless you're getting an obvious benefit from it.
• Always review your credit card bill thoroughly before paying it.

If you stick to these rules, you'll put yourself in a better position to benefit from credit cards rather than have them hurt you financially.

Still have questions?

Some other questions we've answered:

• How Many Credit Cards Should I Have?
• Best Secured Credit Cards
• Secured vs. Unsecured Credit Cards: Which Should You Get?