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This article was last updated Jun 04, 2018, but some terms and conditions may have changed or are no longer available. For the most accurate and up to date information please consult the terms and conditions found on the issuer website.
Credit cards can be a great asset if used responsibly — you have the potential to earn rewards, finance new purchases, get out of debt and simplify bill pay among many other benefits. But, at the same time, they pose risks for some people who may be tempted to overspend and fall into debt.
Depending on your situation, a credit card may or may not be the right choice. In this post, we’ll review the pros and cons of having a credit card so you can make an educated decision if a credit card is the right choice for you.
The pros of credit cards
- They can help you build credit. If you want to get an auto loan, apply for an apartment lease or finance a house one day, a healthy credit score is going to be your ticket to the best deals and the best offers from banks. A great way to establish a credit history is by by responsibly charging purchases on your credit card, and paying on time and in full each month.
- Better fraud protection compared with debit cards. If you use your credit card to make purchases and become a victim of fraud, consumer protection laws provide more coverage than if you used a debit card. Your liability for credit card fraud is capped at $50 — with most credit card issuers offering $0 fraud liability. That’s compared with debit cards that may hold you liable for up to $500 of fraudulent charges — and if you don’t catch fraud within the 60 days that it occured, you’re 100% liable for all fraudulent charges.
- You can earn rewards. Many credit cards today offer some type of rewards, whether it’s miles, cash back or points when you make a purchase. These programs are a great way to reward you for typical purchases, and may be redeemed for statement credit, gift cards, travel and more. The key is to not let the promise of rewards drive you to overspend. Check out our top rewards credit cards.
- Extra perks can save you money. Depending on the credit card you open, you may receive purchase protection, travel insurance, extended warranty protection, travel credits, roadside assistance and more when you use your card. These benefits add value to your card and have the potential to save you money. Keep in mind terms apply and you should refer to your cardmember agreement for more details.
- They can be a good way to consolidate your debt. If you have lingering credit card debt, you may be able to transfer that debt to a balance transfer credit card that offers an intro 0% APR period. During the intro period, you won’t be charged interest on the balance transferred. But, beware some cards may charge you all the interest you accrued during the intro period if your balance isn’t paid in full by the end of the intro period — also known as deferred interest. Keep in mind, many balance transfer cards come with balance transfer fees that typically are 3% or 5% of the transferred balance — but you can find cards with intro $0 balance transfer fees.
- Pay down new purchases over time. If you’re thinking of purchasing new furniture or a laptop, consider opening a card offering an intro 0% APR period for purchases. Similar to a balance transfer intro period, cards with purchase intro 0% APR periods won’t charge you interest on new purchases for a fixed time period. Beware, deferred interest may apply, so be sure to pay your balance before the intro period ends.
- Some cards offer increased purchase protection. With a credit card, you often receive purchase protection that may cover lost, damaged or stolen items. So if you buy a new TV with the card and it starts to malfunction or you order something from an online seller and don’t receive it as promised, you may be reimbursed with purchase protection. Note, terms apply, so read the fine print carefully.
- Track your purchases in real time. Credit cards can be helpful when you want to track purchases and analyze your spending habits. Many cards offer breakdowns of your spending history that can point out recurring charges and categories you spend a lot in. This can provide you with a good understanding of your spending habits, and may help you if you’re looking to cut costs but don’t know where to start.
- They’re convenient. Credit cards have become a very convenient form of payment. You don’t have to carry around cash and can automate recurring charges like electric bills or Netflix subscriptions. Also, you have more purchase options with a credit card as you can pay online or over the phone — two things you can’t do with cash. Another point to consider is that some merchants only accept credit now, leaving you no other choice but to use a credit card.
- Help with emergencies. If you find yourself in an emergency situation, a credit card can come in handy. You may not have cash on you or enough funds in your checking account to cover unexpected costs, but you may be able to use your credit card — granted you have an available line of credit.
- Easy to use abroad. When you travel abroad, it can be a hassle to wait in line at currency exchanges, so a credit card is a great option that allows you to simply swipe your card to pay for purchases. The credit card issuer will handle the conversion, but watch out for possible foreign transaction fees that can be 3% of each transaction. However, there are credit cards that don’t charge foreign transaction fees.
The cons of credit cards
- They are a very expensive way to borrow money. Credit cards often come with variable interest rates — also known as APRs — that you may be charged if you carry a balance month to month or overdraw your account. These interest rates are often upward of 14% and can add up to significant charges if you don’t use your card responsibly.
- It’s easy to overspend and fall into debt. Credit cards typically provide you with more spending power than alternatives like cash or debit cards, and as a result you may use the increased line of credit to spend more than you can afford to pay at your payment due date. Also, if you have a rewards card, you may be tempted to overspend just to earn rewards. Keep in mind that your credit score is greatly impacted by how much debt you use versus how much debt you have access to. Aim to charge no more than 30% of your total available credit limit,
- Fraudsters routinely hack credit cards. By using a credit card, you risk possibly becoming a victim of identity theft or fraud if someone skims your card, breaches a merchant’s security or hacks your account. Fortunately, as we noted above, most issuers provide $0 fraud liability to protect you in instances of unauthorized charges. Check your credit account routinely for signs of fraud, or sign up for free credit monitoring at a site like My LendingTree. (Note: LendingTree is the parent company of CompareCards.com)
- The fine print can be confusing. If you’re not familiar with credit and how it works, you may be confused with the terms provided in your cardmember agreement. Banks include pages upon pages of fine print listing various fees which may cause confusion. For example, if you don’t realize your card has a foreign transaction fee, you may get hit with 3%-5% surcharges on all your purchases if you use the card outside of the U.S.
- Numerous fees. Credit cards often have various fees such as annual fee, late payment fee, cash advance fee, balance transfer fee and foreign transaction fee, among others. If you’re not responsible with your card, you may incur some of these fees, potentially making the use of a credit card very expensive.