Like most lending products, credit cards can often help you by offering financial shortcuts, but it’s important to be aware of their potential pitfalls. Many factors can affect your finances when it comes to credit -- from your choice of credit card to your spending habits -- for better or worse.
Pros of using credit cards
Build credit history: Those who use credit cards responsibly can benefit from an improved credit score over time. A good credit score leads to an easier time renting an apartment, better credit card options and cheaper rates on mortgages and car loans.
Access emergency funds quickly: Even if you don’t use a credit card for everyday expenses, having one on hand can be helpful in a pinch. If you need an unexpected home maintenance repair or car repair, for instance, you’ll be able to fund it regardless of your checking account balance.
Purchase big-ticket items over time: You don’t have to pay off purchases in full on the due date, though it’s best to. Alternatively, some credit cards offer 0% introductory APRs so that you can pay down a large purchase over time while avoiding interest.
Track spending easily: Credit cards enable a detailed record of your spending. Many credit card issuers offer customizable views of your spending online or via their apps, but a full ledger of your monthly spending will also be available on your monthly credit card statement.
Rewards: With the best rewards credit cards, you earn points, cash-back or miles on all of your spending. Many rewards credit cards don’t charge an annual fee, which means all you have to do is spend money to earn rewards toward statement credits, travel and more.
Purchase protection: Offered by some card issuers, purchase protection can help you get your money back if your purchase ends up damaged or stolen. Coverage varies between card issuers and specific cards, but generally it includes new items that are damaged, defective or stolen within 60 to 120 days of your purchase.
Convenience: You don’t have to carry around cash or checks to shop or pay bills. You can simply swipe your credit card or input the information online.
Consumer protections: Credit cards may offer fraud protection, extended warranties, price protection, damage and theft protection and travel and car rental insurance.
Cons of using credit cards
Temptation to overspend: You can spend up to your card’s credit limit, which often means you can spend more money than you have. It’s important to monitor your spending and avoid impulse purchases. You should treat a credit card as if it were cash.
Interest charges: If you’re not careful, any balance left on your credit card beyond its due date will accrue interest charges. Interest adds up quickly and can get you stuck in the debt cycle.
Cash advances: If you needed to take out cash from your credit line, you would do so via a cash advance. Cash advances are notoriously expensive, as there are upfront fees as well as a high APR applied to the balance. Personal loans are typically much less expensive than cash advances.
Fees: Credit cards can come with a number of fees. You can typically avoid annual fees by choosing your credit card accordingly, but there are also penalty fees, foreign transaction fees, late fees and more to watch out for.
Can hurt your credit: If you’re not careful, a credit card can sink your credit way faster than it can build it. Make sure you keep a close eye on your account and pay your bills on time. In a similar vein, applying for too many credit cards in a short period of time could damage your credit.
How to use a credit card responsibly
There are a few things you can do to make your credit card work for you in the best way possible, regardless of the pros and cons. You should always monitor your spending and bills carefully to make sure there aren’t errant charges and that you’re not going over budget. You should also always make sure to pay your bill on time and in full. Ideally, your credit card balance should stay below 30% of your credit limit at all times. Try to avoid pricey options like cash advances or revolving balances, and take advantage of rewards and other perks as you can.
The bottom line
While credit cards have many benefits, there are also some potential downsides to consider. If you are not disciplined, you may overspend and accumulate debt. Additionally, credit cards typically have high interest rates, which can make it difficult to pay off your balance. But if you pick the right credit card and strategize correctly, a credit card can help you reach your financial goals.
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