Today, credit cards reign as one of the most popular payment methods with 84% of adults in the United States owning a credit card. For most Americans, credit cards are their first introduction to managing credit with 73% of Americans having a credit card by the time they turn 25. Even though they're widely used, it's imperative to understand all the pros and cons of credit cards. Let's explore the pros and cons of credit cards, how to manage your cards responsibly, and potential alternatives.
What Are the Pros Of Credit Cards?
Credit cards offer a bevy of benefits over cash and other forms of payment, such as:
Credit Cards Can Help Build Credit
Your credit history is your track record of borrowing funds and paying them back as intended. According to Experian, the credit score they calculate for consumers is comprised of five different factors:
Responsibly using your credit cards can help improve every credit score factor, bolster your quality of life, and move you closer to your financial goals.
Pay for Goods Over Time
When you use a credit card, you don't necessarily have to worry whether you have the exact amount in your checking account. Instead, a credit card allows you to receive your goods today and possibly spread your payments out over a period. And as long as you pay your credit card balance off within the grace period, you may not be charged interest. The grace period on most credit cards is the time between the end of your billing cycle and payment due date.
Unrivaled Convenience
Thanks to technological innovations, paying for your goods with a credit card can be as easy as tapping your card onto the processing machine. Most online merchants allow you to store card information on their secure platform. You can even store your credit card information on your smartphone or smartwatch to make purchases without physically having the credit card in hand. Whether you use your smartphone, digital wallet, or physical credit card, paying with credit cards is as easy as it can get.
Reward Points
One of the major perks of using credit cards is the perks or reward points. Today, 87% of cardholders have at least one card that offers rewards, according to a LendingTree Survey. Reward points are incentives you earn from doing what you will already do — spend money. These points can be redeemed for cash, discounts, savings, and more. For example, if you spend $5,000 a month on monthly expenditures and use your 2% cash back credit card, you would earn around an extra $100 a month in rewards points from doing what you are already doing. In about a year, you can earn around $1,200 in Cash Back rewards.
Increased Security
In addition to the other pros of credit cards, this form of payment is much safer. Consider this: if you lose $1,000 in cash, it's just gone. However, if someone steals your credit card or personal information and runs up $5,000 in fraudulent charges, you may not be liable for the charges. At the same time, most credit card companies will monitor suspicious activity and alert you to review the charges.
Cons of Credit Cards
While credit cards have advantages, they are not without cons, such as:
Let's quickly explore each to understand potential implications.
High Potential for Overspending
Too much of a good thing can be bad — and convenience is no different. Remember the convenience of a credit card? It can also increase the likelihood of you overspending. To avoid overspending, stay informed of your balance and only spend what you can pay back each month or what your budget allows.
Some Credit Cards Have High-Interest Rates
While credit cards are convenient, you may pay a high cost for this benefit. Credit cards have a much higher interest rate than other lending products, such as personal loans. For instance, the average interest rate on credit cards in August of 2022 was 16.27%, while personal loans were only 10.16%. Failing to pay your balance each month can lead to interest charges, which can increase your debt.
Cash Can Be Expensive
Credit cards are excellent for day-to-day purchases and expenses. But if you need cash, your credit card can be the most expensive source. While your credit card may offer cash advances, the interest rate on this money is significantly higher than on purchases. If you find yourself in need of cash, consider a personal loan or another source.
Credit Card Misuse Can be Very Harmful
When you use your credit cards responsibly, it can offer you extra freedom and help build positive credit references. However, if you have missed or late payments, it can devastate your credit and long-term financial fitness.
Beware of the Credit Card Fine Print
Credit card disclosures and fine print aren't designed to be user-friendly. Attorneys draft these multi-page documents to protect the interests of the credit card company. Oftentimes, key information is buried and not exactly easy to understand, such as:
10 Simple Tips to Maximize the Pros and Minimize the Cons of Your Credit Card
Your credit card can be a valuable tool as long as you use it responsibly. Here are a few tips to maximize the pros and minimize the cons of your credit card.
Alternatives to Credit Cards
While credit cards are convenient for day-to-day purchases, credit cards may not be suitable for all instances, especially when you need cash. Here are a few viable alternatives to credit cards:
Frequently Asked Questions
What Is the Biggest Problem with Credit Cards?
The biggest problem with credit cards is the potential for high-interest debt. If not used responsibly, credit cards can lead to a cycle of minimum payments and accruing interest, making it difficult for the cardholder to pay off the balance. Additionally, if not managed properly, credit card debts can quickly spiral out of control and harm your overall financial stability.
Can I Use a Credit Card Every Day?
A credit card can be useful for everyday purchases. However, it's important to remember that you'll need to make regular payments to avoid additional fees. There are many factors to consider when determining the best ways and times to use a credit card.
What Is the Point of Getting a Credit Card?
The main reasons people get a credit card is to have more purchasing power and to establish a credit history. It's crucial to understand your reasons for wanting a credit card so you can make the most of it.
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Sources
https://www.consumerfinance.gov/ask-cfpb/what-is-a-grace-period-for-a-credit-card-en-47
https://www.lendingtree.com/credit-cards/study/unused-rewards/
https://www.nerdwallet.com/reviews/credit-cards/citi-double-cash
https://www.foxbusiness.com/personal-finance/interest-rate-credit-cards-personal-loans
