Financial advantages and disadvantages of using credit cards
Credit cards offer a range of benefits that can be advantageous for consumers. These benefits include opportunities to earn rewards, travel benefits, added consumer protections, and protection against theft and damage on purchases.
When approved for a credit card, the card issuer extends a line of credit. However, it's crucial to remember that overspending with a high credit limit can lead to an expensive mistake due to high interest rates. Many premium credit cards charge an annual fee that must be paid each year. High credit card interest rates can result in mounting debt if not paid on time and in full.
To use a credit card wisely and build credit, here are some strategies:
- Pay your balance in full and on time every month. This practice helps avoid interest and late fees, which contribute to a positive credit history. Carrying a balance incurs costly interest that can negate rewards earned.
- Keep credit utilization low. Spending only a small portion of your credit limit improves credit scores and prevents overspending. A low credit utilization ratio is beneficial for your credit score.
- Choose a rewards card that fits your spending habits. Cards offering bonus points on groceries, gas, dining, or travel can help maximize rewards on everyday expenses without extra spending.
- Use promotions and bonus offers strategically. Spending during introductory high-reward periods or rotating category bonuses can increase points or cashback earned, but only if within your budget.
- Combine rewards with cashback apps, shopping portals, or “stacking” strategies. This approach can multiply your returns, for example, using a credit card through a portal with cashback plus store-specific offers.
- Treat every credit card purchase as real money. This mindset helps avoid debt and maintain financial discipline.
- Be selective about where and how you pay. Some bills or payments have fees that outweigh rewards. Always calculate if using a credit card for specific payments makes financial sense.
Applying for multiple credit cards at once can temporarily bring down your credit score with hard credit inquiries. Rewards credit cards can help earn cash back, points, or miles on common purchases, and may offer welcome bonuses after hitting a certain spending threshold.
To build credit using a credit card, it's best to pay at least the minimum amount by the monthly due date and keep a low credit utilization ratio. Making late payments or not paying at least the minimum amount due will hurt your credit score.
High interest rates are a disadvantage of credit cards, with the average credit card interest rate being over 20 percent. The best 0 percent APR cards could help pay off high-interest debt or make a large purchase over time, but it's important to pay off the balance in full before the intro period ends to avoid high interest rates.
Credit cards offer zero-liability fraud protection on unauthorized charges, as long as they are reported within 30 days. Card issuers regularly report account activity to the three major credit bureaus. Unlike credit cards, debit card activity isn't factored into credit scores.
Credit cards may charge late fees, foreign transaction fees, balance transfer fees, and more. The best credit cards come with benefits and convenience, but there are risks, including high interest rates and potential for overspending. Some co-branded cards and store cards promise financing without interest charges for a promotional period, but failing to pay the full balance by the promotional period's end could result in owing all of the interest.
In summary, paying off your bill fully and promptly, matching cards to your spending, optimizing rewards without overspending, maintaining low utilization to build credit, and using reward stacking while staying disciplined can help avoid debt. Using a credit card can improve financial health by building credit and earning rewards.
- To optimize the benefits of a rewards credit card, it's essential to make timely payments to avoid late fees and maintain a positive credit history.
- Pursuing personal-finance management strategies, like keeping a low credit utilization ratio and choosing a card with rewards that align with your spending habits, can help you reap the advantages of credit cards without the potential financial risks.
