- Credit cards offer the chance to build credit, spend securely and earn rewards along the way.
- They can also pose a risk to your financial security with high costs and low minimum payments.
- The decision on whether or not to use a credit card for bills or other expenses depends on your situation and goals.
Credit cards can be tricky for consumers. On the one hand, they can provide a lot of value with their rewards and benefits, security features, credit-building properties and other aspects. But if you're not careful, they can pose a significant risk to your financial well-being. One missed payment can damage your credit score and paying only the minimum toward larger bills could put you behind the 8-ball with interest charges.
If you're thinking about getting a credit card or you're trying to determine whether or not to hold onto your existing cards, it's important to understand both the perks and pitfalls that come with the plastic in your wallet.
Inside this article
Advantages of using credit cards
There are many advantages of using credit cards over other payment methods, particularly if you can manage to rein in your spending and stick to a budget.
Note that while credit cards do charge relatively high interest rates, you can enjoy the benefits of having one and avoid interest by paying your balance in full each month. Here are some of the more prominent benefits to consider.
Most credit cards use EMV technology, which entails using a chip to encrypt your card information when you use it for point-of-sale purchases, keeping it safe from hackers. Even if your card information does get stolen, card issuers typically provide zero-liability fraud protection, so you don't need to worry about losing any money.
What's more, you don't have to worry about any money coming out of your account, "because you are using the bank's money instead of your own," says Keritan Shelby, CEO of JMS Consulting Firm, a credit repair agency.
With a debit card, money stolen from your checking account may not be returned quickly enough to cover your other bills, and if you use cash, your chances of getting stolen money back may be slim.
Using credit cards to build credit can be an excellent strategy because you can do it without paying interest—as long as you pay your bill in full every month.
Your payment history and credit utilization rate, or the percentage of your credit limit that you're using at a given time, are both very important factors in your FICO credit score, so using your card responsibly can pay off in the long run.
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Rewards and benefits
A lot of credit cards offer rewards in the form of cash back, points or airline miles, which you can use to get cash, book travel, buy gift cards and a lot more. Some cards may also offer other perks that can add value to your everyday life and travel experiences.
Depending on how you use your credit cards, you could get hundreds or even thousands of dollars in value every year.
If you're using a budgeting approach like the envelope system, you'll need to ensure you always have enough cash on hand for your everyday purchases. With a credit card, however, you can shop online and in person without having to run to the ATM.
Disadvantages of using credit cards
While there are some clear benefits to using a credit card, it's also important to understand the potential disadvantages of using credit cards regularly.
On average, credit cards charge a 16.65% interest rate, according to May 2022 data from the Federal Reserve. In contrast, a two-year personal loan has an average rate of 8.73%.
While you can avoid interest by paying your credit card bill in full every month, it can get expensive fast if you overspend and carry a balance.
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A credit card sign-up bonus can be particularly dangerous if you can't meet the minimum spending requirement to earn it with your normal spending.
"When credit cards release a high spending bonus to get an absurd amount of points, who would want to pass that up?" says Shelby. "Improper understanding of your budget can lead to [overspending]."
Additionally, many credit cards charge annual fees and fees for balance transfers, cash advances and more. While it's possible to avoid these fees, they can add up if you use your card in certain ways.
Low minimum payments
One of the biggest problems with credit cards is that the minimum payments are designed to encourage debt. If you get caught in the “minimum payment trap,” your balance can balloon quickly over the course of just a few months, making your everyday spending a lot more expensive than you originally intended.
Potential damage to your credit
If you maintain a high balance relative to your credit limit—some experts recommend keeping your utilization rate below 30%, but there's no hard-and-fast rule—or you miss a payment by 30 days or more, your credit card could end up doing more harm to your credit score than good.
As a result, overspending can hurt your budget and your credit history if you're not careful.
Is giving up credit cards a good idea?
Your decision on whether or not to use credit cards is a personal one, so it's important to objectively evaluate your situation.
Here are some considerations to keep in mind as you think about what to do:
What are your spending habits? According to a report by the American Bankers Association, 40% of credit card users carry a balance from month to month. If you think that you'll end up carrying a balance from month to month, a credit card may not be the right fit for you. But if you can pay in full and avoid interest, the risk of getting into debt is likely low.
Do you prefer cash or debit? Whether you're on the envelope budgeting system or you simply want to avoid the potential risk of credit card debt, there's nothing wrong with choosing the payment method that makes you feel the most comfortable.
Do you have existing credit card debt? If you're working on paying down credit card debt right now, using your card at the same time may make you feel like you're just spinning your wheels. If this is the case, cutting up your cards and going cash only may be the right move, at least until you get your debt situation under control.
Do you have a steady income? If your income is irregular, there may be no guarantee that you'll be able to pay your bill in full every month. If it is, though, you may feel more certain that you can enjoy rewards, benefits and other features without the threat of debt.
Tips for using credit cards responsibly
If you've decided to continue using credit cards, it's important to ensure that you're using them responsibly to avoid interest charges and expensive debt. Here are some bits of advice that can help:
Get on a budget and plan your spending to avoid overextending yourself
Make it a priority to pay off your balance on time and in full every month
Consider making multiple payments throughout the month to keep your balance low
Keep an eye on your credit utilization rate and adjust your spending and payments to keep it low
Avoid overspending to earn a sign-up bonus or rewards
Review your online account regularly to spot potentially unauthorized transactions
How to stop using credit cards
If you've been using credit cards but want to stop, either because you're in debt or you simply want to make a change, here are some tips to help:
Freeze the card in a block of ice to give yourself some time to consider your spending decision
Cut up the card to make it inaccessible—a replacement card can take several days to arrive
Leave your cards at home instead of keeping them in your wallet
Pay off your balances and close your accounts (though closing them could temporarily decrease your credit score)
Get on a budget to better understand your income and expenses and improve your odds of spending within your means.
Whatever you decide to do with your credit cards, the important thing is to take the time to consider your situation and both the pros and cons of their use and make the right decision for you.