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Credit cards offer convenience, consumer protections and in some cases rewards or special financing, but they may also tempt you to overspend, triggering a debt cycle, and they come with interest rates that are generally higher than comparable fixed-rate loans.
Here are pros and cons of credit cards to consider if you're wondering whether opening one might be a good move.
Pros of Credit Cards
Managed responsibly, credit cards have plenty of advantages to offer cardholders.
Convenience
It's easy to pull out a credit card to buy what you want to, when you want to. It doesn't get much easier than buying online with a merchant or platform that already has your information stored. Whether in your hand or your digital wallet, credit cards make payment just about as easy as it can get.
That convenience also means you don't have to worry that there's not yet enough money in your checking account because you don't get paid for a few days.
Dividing a check? Most restaurants will happily split the check for you and you can put it on individual cards.
Consumer Protections
If you use a credit card to buy a product that turns out to be unsatisfactory, was falsely advertised or never arrives at all, you can dispute the charge with your credit card issuer. Many credit cards also offer zero liability when unauthorized purchases are made on your card, meaning you won't be responsible for paying the charge. Your money is not tied up while the matter is decided (you get a temporary credit).
Potentially Free Financing
Some credit cards offer 0% interest rates for an introductory period, giving you several months to over a year to pay off purchases without accruing interest. Some retailers offer "same as cash" deals in which you owe no interest if you pay off your balance within a certain time frame. (If you don't make the deadline, though, you could be on the hook for all the past interest.) If you are repaying high-interest debt, a reprieve from interest can save money.
Travel Perks and Reservations
Ever try to buy a plane ticket or reserve a hotel room without a credit card? It can be done, but not easily. And if you use a debit card, there may be a hold placed on the card for the entire amount, plus incidental charges, to make sure all is covered.
In addition, many travel credit cards include extras like concierge services, access to airport lounges and rental car insurance, and don't charge foreign transaction fees when you use the card outside the country. Some cards also include travel insurance or extended warranties.
Earn rewards for your spending
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Rewards
Whether it's cash back, a free award night in a hotel or airline points, you can score some significant savings with the right credit card. It's worth noting that some of the most generous rewards programs come from cards with an annual fee.
And, if you typically carry a balance, be aware that any rewards will not outweigh the interest rate of the card. These cards should be paid off every month to get their full value.
Easy Recordkeeping
Many cards allow you to search for transactions. This can be especially helpful at tax time or when making choices about insurance coverage.
Potential to Build Credit
Used responsibly, credit cards can help you build credit—and that is one thing cash and debit cards cannot do for you. It's important to remember that you do not need debt to build a good credit score: Paying your full balance by the due date each month will do just as much or more to help your credit than carrying a balance on your card. That said, missed or late payments and high balances can hurt on your scores.
Cons of Credit Cards
Credit cards also have their drawbacks, which mainly center on their financial risks.
Risk of Overspending
The ease and convenience of using a credit card is precisely why it's so easy and perhaps tempting to overspend.
Unlike a wallet that grows lighter as you spend, a credit card with a big limit may allow you to keep right on spending until you hit your credit limit—and that can lead you into a cycle of making only minimum payments as your debt grows. Maintaining high balances on your credit cards can also do serious damage to your credit scores.
Potential Debt
Because credit cards allow you to spend more than your budget will accommodate, you can end up paying significant interest while making little progress on repaying credit card debt.
The best practice is to use cards for convenience and to pay the balance in full every month. Not everyone can do that, but a high balance—unless you have special financing—usually means you'll pay more in interest and can suggest you owe more than you can comfortably repay.
Variable Interest Rates
Credit cards typically have variable interest rates, which rise or fall based partly on the federal funds rate. Particularly in an environment of rising interest rates, the cost of carrying a balance on a credit card can go up, and that can mean it's harder to budget. In the best case, variable interest doesn't matter because you're using it as a convenience or to earn rewards and paying off your balance each month. But if you carry a balance, finance charges can go up.
Fees
Paying late—even if it's not late enough to get reported to credit bureaus—can result in fees. Some credit cards also have annual fees or, in the case of some premium cards, fees for adding an authorized user. There may also be fees for cash advances. Some fees, such as annual fees, may be worth it if you're earning rewards that outweigh the fees. It's smart to familiarize yourself with fees and what triggers them. You may decide fees are worth it, but you might also look for ways to avoid them if you don't think you're getting value from them.
How to Use a Credit Card Responsibly
A credit card can be a useful tool when used responsibly. Like every tool, it works best in skillful hands. You can avoid some of the potential pitfalls of credit card by:
- Setting up alerts so that you get a text or email when the card is used or the balance reaches a threshold you select
- Using autopay for at least the minimum payment—or the entire balance if there is always enough in your bank account to cover it
- Spending only what you can afford to pay back each month or making sure you finish paying a 0% introductory rate or "same as cash" deal well before the expiration date
- Paying the monthly balance in full, particularly if it's a rewards card
- Knowing your credit card interest rates, so that you can choose the lowest rate if you can't pay off the entire balance
- Paying at least the minimum payment due, on time every time, because even a single late payment can badly damage credit
Alternatives to Credit Cards
It's hard to beat credit cards for convenience and perks, but if you're unsure about getting a new card, there are other options. If you need to finance something other than a car or a home, you could consider a personal loan or an installment loan geared toward buyers of a particular household item, such as furniture, appliances or mattresses.
Personal loans can also help you consolidate your credit card debt into a fixed-rate loan, often at a lower interest rate. That can be a smart financial move that saves on interest and potentially helps your credit score.
If you're considering a credit card because you're struggling to make ends meet, you could seek financial assistance, ask family or friends for a loan if you know you'll be able to pay it back, or look into an early payday app to help you get to your next paycheck (note these are not the same as payday loans, which should be avoided due to their high fees).
The Bottom Line
A credit card can be a great convenience, and rewards cards can help you stretch your travel dollars or offer cash back on purchases. They also offer consumer protections and some perks that cash does not.
But credit cards can tempt you to overspend and don't offer the same sort of feedback that an empty wallet or low bank balance does. It's easy to get yourself into serious debt, and fees plus higher interest rates can make it difficult to climb out.
Knowing yourself can help you decide if a credit card is the right choice for you. You don't need a card to build good credit, but a credit card can make your life easier, with perks and rewards you won't get if you rely solely on cash or debit cards.
If you believe a credit card is the right choice, Experian's free card comparison tool can help you sift through the possibilities to find one that is right for you and give you approval odds.