If you need money and don’t have it to spend, credit cards offer a convenient way to finance a purchase, while also helping you build credit and, potentially, earn rewards from your spending.
However, that money from your credit card isn’t free -- it’s a revolving loan, and if you don’t pay off your balance in full at the end of the month, you’re going to start paying interest on it. Though using a credit card wisely can provide a host of benefits, the risks of credit cards include overspending, spiraling debt, bad credit and high interest rates.
We’ve got everything you need to learn how to best use a credit card. Discover the pros and cons of credit cards, to reap the rewards and avoid the risks. For more on credit cards, check out our beginner’s guide to credit cards and peruse the best travel credit cards for making plans this summer.
Read more: Best Credit Cards
What are the pros of credit cards?
Cardholders receive a long list of benefits when using credit cards for purchasing products and services. Here are some of the most important.
Convenience
One of the biggest advantages of using a credit card for spending is the ease of use. It’s a lot simpler to keep a card in your wallet than a wad of cash, and you don’t have to worry about coins or change at all. And thanks to virtual wallets and cards, sometimes all you need is a phone to complete your purchase.
Financing for large purchases or emergencies
Along with convenience, one of the most essential features of credit cards is that when used wisely, you’ll always have available money when you need or want it. If you need a short-term loan to buy holiday presents or unexpectedly need to rent a hotel for a week because your pipes burst, a credit card can be a life saver.
Credit cards are the easiest way for most consumers to borrow money, and your credit limit will also let you know exactly how much you can borrow. Crafty consumers might use a 0% introductory APR card to fund a larger purchase and pay off their balance during the intro period, potentially receiving an interest-free loan. These cards let you borrow money for spending with no finance charges at all for a specific period of time, usually from 12 to 21 months.
Earning rewards
Credit card rewards have become an industry of their own, as issuers provide money and benefits back on spending. Depending on your card, you may earn flat-rate rewards on general spending, or higher rewards on certain categories, like travel, gas or streaming services.
Credit building
Using a credit card for spending is one of the quickest and easiest ways to build credit, especially if you have limited or no credit history. Each of the three credit bureaus has slightly different rules for monitoring your credit, but making credit payments on time is a major factor for all of them, as is your total amount of available credit. Using your credit card responsibly, keeping your balance low and paying on time will provide a boost to your credit score.
Currency conversion
If you’re traveling in a foreign country, credit cards can make currency conversion obsolete. Just pay for everything with your credit card and let your issuer handle the conversion.
With a credit card, you’ll get a competitive exchange rate and a reasonable currency conversion fee or none at all. To save the most money when traveling, opt for a credit card without foreign transaction fees.
Purchase protections
Most credit cards provide reimbursement for items that are stolen or damaged within a certain period of time after their purchase, usually 90 to 120 days. There will usually be a maximum of how much you can be reimbursed within a year. Credit cards generally won’t cover lost items, but they may offer additional protections, like warranties, for certain types of products.
Most major credit cards will also provide some protection for damage to rental cars, helping you skip extra charges from the rental company. The protection generally kicks in after your own personal auto insurance, but it can be helpful to cover any deductibles.
In the case of payment disputes, cardholders have the power of credit card chargebacks, in which issuers review payments and refund cardholders by retrieving money from merchants.
Fraud and theft protection
Both credit cards and debit cards have robust protections against fraud, but credit cards are stronger. Debit cards require that you report the fraud within 60 days, and you could potentially lose as much as $500, whereas credit cards limit your liability to $50 when you report fraud after the charges occur. However, some credit cards may offer $0 liability, giving you additional peace of mind.
Credit cards can also give you a heightened sense of security when out and about. If you have a large amount of cash and are robbed or lose your wallet, your money is gone. If your credit card or wallet gets stolen or lost, report it to your issuer and you’ll often have no liability.
What are the cons of credit cards?
Despite all of the benefits of credit cards, there are some clear risks.
Risk of debt
While credit cards are one of the simplest ways to borrow money, they also charge more interest than most loans, depending on your credit score. The average credit card APR is 20.37%, per Bankrate, as of June 1. If you don’t pay off your balance each month, that means you’ll be paying about $204 annually on a $1,000 balance.
Depending on your credit, debt consolidation loans usually charge significantly less interest, and home equity loans provide even lower rates.
Variable interest rates
Not only are credit cards expensive debt, but their interest rates can change over time as well. Though there are some fixed-rate credit cards (which require 45 days advance notice to change APRs), most credit cards have variable rates that are tied to an index rate that’s usually based on the prime rate.
The Federal Reserve has raised the federal funds rate, which sets the prime rate, 10 times in the last 15 months, boosting it from 0.50% in March 2022 to the 5.00% – 5.25% range today. Those hikes have made credit card debt more expensive -- the average credit card rate has risen 4.51% in those 15 months, according to SF Gate.
Credit card fees
Americans paid nearly $120 billion in credit card fees each year from 2018 to 2020, according to the Consumer Financial Protection Bureau. That’s approximately $1,000 per household. Though some credit cards have no annual fees, about 38% of cardholders pay annual fees that average out to $178 each year, per ElitePersonalFinance.
Late payment fees are also another major cost for people who use credit cards. The Consumer Finance Protection Bureau estimates that Americans pay $12 billion in late fees every year, though it has proposed new rules to reduce such fees.
Potential to overspend
The convenience of credit cards and the lack of connection to your available funds creates a serious risk of overspending. You can spend as much as you want up to your credit limit, no matter how much money is in your bank account.
Numerous studies have shown how using a credit card encourages people to spend more than they would normally. Research indicates credit cards reduce the “pain of payment” and decouple your purchase from your eventual credit card bill. A study from 2021 demonstrated that spending with credit cards may activate the part of our brains associated with reward perception and addition. Spending with cash or a debit card didn’t result in similar brain activity.
Credit score damage
Just as credit cards can help you build good credit, they can also hurt your credit score. The biggest mistake to watch out for is making a late payment or missing a payment altogether -- payment history is the biggest factor for both your VantageScore and FICO credit scores. A credit card payment that’s more than 30 days late can drop your score 180 points, according to LendingTree, and will stay on your credit report for seven years.
You’ll also take a slight hit to your credit score whenever you apply for a credit card, because of the hard credit check, though it’s usually only about 5 points and disappears after a year.
Potential deferred interest
Watch out for credit cards advertising zero interest rates that aren’t 0% intro APR cards. Deferred interest credit cards provide the same initial offers as 0% intro APR cards, but with a huge twist.
As long as you pay off your balance in full by the end of the term -- usually 12 months -- you won’t have to pay any interest. But If you don’t clear your balance on a deferred interest card by the end of the zero-interest period, you’ll owe the accrued interest on your monthly balance for the entire period.
More expensive to get cash
Though credit cards can be used almost anywhere, we’re all bound to run into a cash-only merchant or event at some time in our lives. If your credit card is your only way to get cash, it will cost you.
Credit card companies will charge a fee for cash advances, usually 5% of the amount or $10, per Experian, and they will often charge a higher interest rate on the cash that you borrow. Most credit cards have a cash advance APR that’s higher than their APR for standing spending.
What’s the best way to use a credit card?
As everyone’s financial situation is unique and there are countless types of credit cards, there’s no one best way to use them -- a retiree who travels frequently is going to use a credit card differently than a young student with their first card. However, there are some standard best practices for using credit cards.
The first best thing to do is find a credit card that works for you and your financial goals. Are you trying to build credit? Be prepared for emergencies? Reap big rewards on heavy spending in certain categories? Research and review credit card terms carefully before applying. Don’t apply for multiple credit cards, to avoid damaging your credit score.
Once you’ve got your credit card, use it wisely. Don’t spend more than you can afford, and always make at least your minimum payment on time each month. If possible, pay your balance in full every month to avoid finance charges.
Keep your credit card balance as low as possible, generally under 30% of your credit limit to optimize your credit score. Monitor your credit scores to see if your credit card use is having an impact. Review your credit card statement each month to check for unauthorized or fraudulent charges, and also track your credit card’s current APR.
Used responsibility, credit cards can deliver a wide range of financial benefits, but the risks always persist. Diligence and discipline will help you stay on top of your credit card to keep it working for you -- and not against you.
Editors’ note: An earlier version of this article was assisted by an AI engine. This version has been substantially updated by a staff writer.
The editorial content on this page is based solely on objective, independent assessments by our writers and is not influenced by advertising or partnerships. It has not been provided or commissioned by any third party. However, we may receive compensation when you click on links to products or services offered by our partners.
