Like most things, there are many advantages and disadvantages of credit cards you should know. Credit cards get a bit of bad rap in the personal finance space but if used correctly, they can be a good tool to help you manage your finances.
There are many advantages of using credit to help your finances. A credit card helps boost your credit score. Many offer extra perks that you can use to get travel miles, cash back, and more.
But the disadvantages of credit card use is that you could end up in a cycle of debt that can be tough to get out of. Before you sign up for a credit card, it’s best to understand the in-depth details of credit card advantages and disadvantages.
Advantages and disadvantages of credit cards
There are a lot of reasons you might want to have a credit card. You might have a credit card with a cashback offer. Or maybe you earn miles when you shop with your credit card.
Just because you have a credit card doesn’t mean that you don’t have money in the bank. But there are many credit card advantages and disadvantages to be aware of if you have or are thinking about getting a credit card.
Advantages of credit cards
There are a number of advantages of using credit instead of debit to make purchases, especially if you use a credit card wisely. Here are just a few:
Builds up your credit score
A credit score is a track record of how much money you borrow and if you pay it back in time. Credit scores are needed to get mortgages, car loans, and even to rent out an apartment.
One of the easiest and simplest ways to build up your credit score is to get a credit card – provided you pay your bill in full and on time. When you make regular payments, the record is sent to credit reporting agencies.
Having a good credit score means you’re likely to get a loan and a much better interest rate than if you have a low credit score.
Can be used in emergencies
One of the advantages of using credit is that it can be used when you need it. Emergencies happen. Maybe you need to replace the tires on your car or fix a plumbing leak but it’s a week until payday and you don’t have extra cash.
With a credit card, you can pay upfront and then pay it back when you have more funds available. Just remember that you need to pay off the credit card when it’s due. Or you may end up having to pay even more later.
Hence why it's always a good idea to work towards an emergency fund.
No interest is owed if you pay on time
So interest can be listed for both credit card advantages and disadvantages. Although credit cards often have very high-interest rates, you won’t pay any interest on your credit card if you pay it off in full each month.
This means you don’t need to worry about getting into a lot of debt. And if you don’t use your credit card that month, then you won’t have to pay anything.
Purchase protection
If you have a credit card and there is a purchase dispute, you can almost always have your credit card company step in to deal with it. This is also true for defective products.
This also makes credit cards a bit more secure than using debit cards. Many will even monitor suspicious behavior and keep you informed of anything out of the ordinary.
While some debit cards have similar protections, it’s usually not as extensive as that offered by credit card companies.
Very convenient
Another one of the advantages of using credit is convenience. You don’t have to worry about how much cash you have or when your next paycheck is coming in.
This makes credit cards really handy to have, especially if you have an emergency. Just remember though that you should pay off your credit card each month. Otherwise, you may find yourself in a lot of debt.
Cash-advances
Many credit cards offer cash advances. So if you’re in dire need of cash, you can get it with a credit card.
However, keep in mind that cash advances come with very high-interest fees which means they are very expensive. If you use this option, it’s essential to pay back the cash advance as soon as possible.
Member perks
Having a credit card can also come with a lot of extra perks. And if you use your credit card for routine expenses, the rewards can add up quickly. The types of rewards you get will depend on each credit card.
Some of the more popular perks include airline miles or cash back. There are some credit cards that offer cryptocurrencies as cashback, or a certain percentage off on some types of products.
While these reward cards often have annual fees, you can easily get your money’s worth if you use your credit card correctly.
Disadvantages of credit cards
There are many great reasons to want to get a credit card. But there are many disadvantages of credit cards as well. Here are the key ones you should be aware of:
High-interest rates
The biggest disadvantage of credit cards is that they have very high-interest rates. Miss one payment and you could find yourself digging yourself into a hole as you try to get out of credit card debt fast.
Credit card companies can charge 15%, 25%, or even higher APR, depending on the type of card and your credit score. It accumulates each month so it can quickly get out of hand. It can take years to pay off a credit card if you don’t make monthly payments.
Encourages impulsive buying
The average credit card debt of U.S. families was $6,125, according to the latest consumer survey from the Federal Reserve. Having the convenience of a credit card makes it easy to get sucked into buying things you might not need.
Because it’s available and easy to use, you could find yourself making more purchases than you would if you didn’t have a credit card. Even more dangerous is if you start to buy things you can’t afford and live outside your means. You may find yourself asking, "Can you pay a credit card with a credit card?"
Fees for late charges
In 2021, about 8% of Americans were over 90 days late on their credit card payments. While you won’t have to pay any interest if you pay off your credit card every month, if you pay late, you can get hit with not only high-interest rates but massive fees for not paying your credit card bill on time.
If you carry a balance, there is usually a minimum you’re required to pay each month.
Annual fees
Credit cards often charge annual fees. How much you’ll be charged each year depends on the type of card and if you signed up with any deals.
Credit card companies can often waive the fee for just the first year, so you might think the card is free until the second year comes around. So do your research on annual fees before deciding on a card.
Can damage credit
One of the disadvantages of credit cards is that they can actually damage your credit. A lot of different factors go into determining your credit score.
This includes the types of loans you have, if you make regular payments, the amount owed, the length of time you’ve had a credit card, etc.
If you have a number of credit cards that are maxed out and you aren’t making regular payments, it could cause your credit score to go down. Even if you are making on-time payments, if your credit card utilization is high it can affect your score.
Credit utilization is how much you owe versus your credit limit. So, if you carry high balances it will cause a decrease in your credit score.
So as you see, there are many credit card advantages and disadvantages when it comes to your credit score!
Additional fees can add up
All the fees that credit card companies charge can add up. It’s not just late fees and the interest you need to be aware of. There are also other fees, including foreign transaction fees, returned payment fees, balance transfer fees, and more.
In fact, the Consumer Protection Financial Bureau claims that the average American household pays $1,000 a year just in credit card interest and fees. Make sure to read the fine print of any credit card contract to make sure you’re aware of all the fees you may have to pay.
Consider the pros and cons of credit cards before deciding!
There are many reasons why having a credit card might make sense. Maybe you want to build your credit score, take advantage of cashback deals, or just want to have a credit card to use in case of emergencies.
Regardless of the reasons, there are many advantages to using credit cards. But there are also many disadvantages of credit cards, such as high interest, lots of fees, and the potential to get into a deep hole of debt.
So before you get a credit card, make sure that you understand both the advantages and disadvantages of credit cards. This will help you make the best decision for yourself!