6 Pros and Cons of Using a Credit Card
Every time you swipe a credit card for a purchase, you’re borrowing money – money that must be paid off eventually.
According to the 2019 Experian Consumer Credit Review, the average American has $6,194 in credit card debt. With high interest rates and fees, this balance can quickly become unmanageable!
Despite this fact, credit cards do offer attractive benefits. So do the pros outweigh the cons? Here are the top credit card pros and cons to help you decide.
- Credit cards help increase your credit score. An excellent credit score is 800 points and up.
- You earn reward points, miles, and cash back when you make purchases with certain credit cards.
- If the credit card company offers zero fraud liability policies, you’re better protected from theft if your credit card is stolen.
- On the flip side, a credit card can quickly lead to massive debt as you spend money that’s not actually yours.
- Too many credit cards can hurt your credit score.
- The average credit card APR was 15.91% in 2021.
- Average credit card processing fees for credit card transactions are typically 1.3% to 3.5%
6 Credit Card Pros and Cons
Pro #1: You increase your credit score.
A credit score is a measure that shows how likely you are to pay back debt. When you make your credit card payments on time, your credit score increases. You’re then more likely to be approved for things like mortgages and car loans.
Credit score ranges depend on the scoring model, but here’s what typical ranges mean:
- Fair: 580-669
- Good: 670-739
- Very Good: 740-799
- Excellent: 800 and up
Increase your score on your credit card by making payments on time. Also, keep your credit card balance below the limit (contrary to what many people think, carrying a balance on your credit card DOES NOT help your credit).
Note: Your credit score matters less than what society says it does.
The bank wants you to focus on your debt and credit score. They make more money when you pay interest. However, your net worth is actually more important than your credit score.
Pro #2: You earn reward points, miles, and cash back.
Some credit card companies let you earn reward points or miles when you use your credit card. There are also cash-back programs where a percentage is paid back of what you spent (typically 1%).
Basically, credit card companies gamify spending. Bonus rewards are normally earned when you spend at hotels, restaurants, gas stations, and supermarkets. These points or piles can be redeemed for things like free hotel rooms and airline tickets.
Reward credit cards also sometimes offer sign-up bonuses. The catch is that you have to spend a certain amount of money in a specific time frame. Also, if you carry a high balance on your credit card, interest is going to far outweigh the rewards.
So while it is possible to take advantage of credit card reward programs, it’s difficult to use a credit card responsibly and not rack up debt chasing after rewards.
Pro #3: You’re better protected from theft.
Unlike cash or debit cards, credit cards offer an extra level of protection against theft. Many credit card companies offer zero fraud liability policies. This means that you won’t be charged for fraudulent purchases if your card is stolen.
Here’s an example: say that your debit card is stolen. If you report the theft before any purchases are made, you won’t be charged anything.
But, according to the Federal Trade Commission, your loss could be up to $500 if you don’t report the stolen card within 60 business days.
With a credit card, your total maximum loss is $0 (and never more than $50 if your credit card company doesn’t offer a zero fraud liability policy, according to the Fair Credit Billing Act (FCBA)).
Note: Newer debit cards now have increased fraudulent security and safety measures.
Con #1: It’s easy to overspend.
When you have money right at your fingertips, it can be very difficult not to spend it. Access to a credit card can quickly lead to massive debt as you spend money that’s not actually yours.
When you purchase items on a credit card, the balance increases. If you don’t pay this balance off regularly, the interest grows. And if you miss payments, you can rack up expensive fees.
Avoid out-of-control debt on a credit card by never spending more than you make. If you can’t afford to make a purchase on your credit card and pay off the balance, don’t buy it. Save for the purchase instead.
Another tip? According to T. Harv Eker, “If you don’t have the money management skills yet, using a debit card will ensure you don’t overspend and rack up debt on a credit card.”
Hint: Sign up for the Core Four of Personal Finance, including Recession Basics course on Udemy for a complete overview of credit card and debt management.
Con #2: Too many credit cards can hurt your credit score.
According to Experian, Americans had an average of 3.84 credit cards during the third quarter of 2020. But multiple credit cards can damage your credit score, rather than help it.
First, opening a new credit card takes a few points off your score. Although it can bounce back quickly, that’s only if you’re responsible with payments.
Multiple cards also makes it difficult to track how much you’re spending and if you’re going over credit utilization rate (aka how much credit you’re using). Experts recommend that you keep your total credit utilization rate below 30%.
“Even if you have every intention of paying your bill in full, a high utilization rate could ding your score by as much as 50 points in the short term,” says Rod Griffin, senior director of consumer education at Experian.
Juggling multiple credit cards can also cause you to forget payment due dates. If you miss even a couple of minimum payments on a card, your credit score will suffer. Once your credit score goes down, it takes time to build it back up.
On top of that, your account age is brought down by new credit cards which is also a damaging credit score factor.
Con #3: Interest rates and fees are high.
Purchasing via a credit card feels so easy in the moment. After all, it means you’re not having to dip into your hard-earned savings, right?
But if you don’t pay it off quickly, that one charge can mean months or years of debt thanks to interest rates and fees.
According to the Federal Reserve, the average credit card APR was 15.91% in 2021. Credit cards are also steeped with fees. For example, average credit card processing fees for credit card transactions are typically 1.3% to 3.5%
Amongst other fees, you could also get hit with a late fee for missed payments. The average maximum late fee is about $36. This interest and fees quickly add up. The average household with credit card debt paid $1,162 in interest in 2019.
Interest is typically compounded daily for credit cards. This means that, even if you make minimum payments, the total amount that you have pay back continues to grow. It becomes harder and harder to dig out of debt as a result.
Fact: Nearly one in five Americans don’t know what the interest rates on their credit cards are.
Payoff Your Credit Card Balance Every Two to Three Days
With these credit card pros and cons, there’s one tip we highly recommend following: pay off your credit card balance every two to three days (rather than at the end of the month. This way, you can build up your credit but never pay any in interest. In short, don’t carry a credit card balance.
Here are a few ways to responsibly use a credit card:
- Use for online purchases to avoid sharing your debit card info online.
- Use for recurring payments such as subscriptions.
- Spend on everyday purchases that you can pay off.
If you’re in credit card debt, make a plan to pay it off as quickly as possible. Want to learn more about personal finance and credit card pros and cons? Take the Core Four of Personal Finance, including Recession Basics course on Udemy. This course teaches you how to effectively manage your money — even during tough economic times! Check out the course here.