Using a credit card can be an effective way to boost your financial well-being by improving your credit score and earning rewards. When you’re approved for a credit card, the issuer extends a line of credit, which you’ll need to pay down at the end of each billing cycle. If you don’t, the balance will start accruing interest.

Credit cards often come with high interest rates, which can quickly lead to significant debt. However, by paying your balance in full and on time, you can avoid these charges and enjoy rewards, plus strengthen your credit score.

Credit Card Pros

These advantages of credit cards can help you get extra value from your spending:

1. Credit-Building Opportunities

Credit cards offer an excellent tool to build and maintain your credit. Your credit score significantly impacts your financial future, from qualifying for auto loans or mortgages to receiving lower interest rates on borrowed money.

By paying at least the minimum amount due each month and maintaining a low credit utilization ratio, you can establish a positive credit history. Credit card companies report your activity to the major credit bureaus, so consistent, responsible use helps build your score over time.

“Responsible use of a credit card can help build credit profiles,” says Kyle Enright, president of Achieve Lending. Debit card use, in contrast, doesn’t influence your credit score, making credit cards a stronger option for improving your financial standing.

2. Rewards

Credit cards often come with rewards, such as cashback, points, or miles on everyday purchases. Many cards also offer welcome bonuses when you meet a specific spending threshold shortly after opening the account.

When choosing a rewards card, consider your spending habits. For example, frequent travelers may benefit from a card that offers travel rewards, while others might prefer a cashback card for daily expenses like groceries or entertainment.

3. Travel Benefits Many credit cards come with additional travel perks, including:

• Travel insurance
• No foreign transaction fees
• Access to airport lounges
• Statement credits for programs like Global Entry and TSA PreCheck “Credit cards are handy for travel,” Enright explains. Rental companies, airlines, and hotels often prefer credit cards for ease in handling potential damages or additional charges, while debit cards might result in a temporary hold on funds in your bank account.

4. Fraud Protection

Credit cards offer robust fraud protection. If you encounter a suspicious charge, you can report it to your card issuer and dispute the transaction. Many cards come with zero-liability protection, meaning you’re not responsible for unauthorized charges as long as they’re reported promptly.

In contrast, if your debit card is compromised, it can take longer to resolve the issue, as you’ll need to wait for the funds to be restored to your account.

5. Purchase Protection

Some credit cards offer purchase protection, covering items that are stolen or damaged within a certain time frame (typically 90-120 days after purchase). This benefit can result in a replacement or reimbursement, though exclusions and limits may apply.

Credit Card Cons

While credit cards can offer significant advantages, there are potential downsides as well:

1. High Interest Rates

Credit cards are known for their high interest rates, averaging around 20%. These rates can vary and increase if you carry a balance. Interest compounds, making it easy to accumulate debt quickly if the balance isn’t paid in full.

2. Fees

Credit card fees can include late fees, balance transfer fees, foreign transaction fees, and annual fees for premium cards. Review your card’s terms to understand the potential costs and how to avoid them.

3. Risk of Debt

A high credit limit can make it tempting to overspend, but this can lead to expensive debt. To avoid this, it’s essential to create a budget and spend only what you can afford to pay off at the end of each billing cycle.

4. Deferred Interest

Some store or co-branded cards offer deferred interest promotions. Unlike 0% APR offers, deferred interest accrues from the start. If you don’t pay off the balance before the promotional period ends, you’ll be charged the full interest amount.

5. Risk to Your Credit Score

While credit cards can build credit, they can also harm your score if misused. Overspending, making late payments, or applying for multiple cards at once can negatively affect your credit. Keeping your credit utilization below 30% and paying bills on time is crucial for maintaining a strong score.

Conclusion

Credit cards can be a powerful financial tool when used responsibly. They can help build credit, offer rewards, and provide valuable protections. However, they also carry risks, such as high interest rates and the temptation to overspend. By managing your card carefully and paying off your balance on time, you can enjoy the benefits while avoiding the downsides.