Getting a Credit Card
There are many advantages and disadvantages of credit cards, so it’s ultimately up to you to decide whether having one (or multiple) cards is beneficial to your life… or not.
Most people have a love-hate relationship with credit cards – and for good reason. As prominent as they are in American society, they come with their share of problems.
To many people, credit cards are a burden they’d rather not have, but they aren’t all bad. As with most things, the thing itself isn’t the issue so much as the way the people use it.
If you’re thinking of getting a credit card – or if you’ve already gotten one but are on the fence about whether to use it or not –, there are several key things to consider.
What are the advantages and disadvantages of credit cards?
Let’s take a look at the advantages and disadvantages of credit cards, starting with the former.
Advantages of credit cards
Instant funds (or emergency funds)
When most people think of credit cards, this tends to be the first thing that comes to mind: Get a credit card, get instant money.
And it’s true, though that “instant money” doesn’t come without a price – but more on that in a moment.
Credit cards can be an excellent source of quick funds if you need them though. And they can be great for emergencies or when your bills are due and you haven’t gotten paid yet.
While it’s better not to have to rely on them – see the disadvantages section below –, credit cards can definitely come through in a pinch.
Credit-building
While building your credit may not be your first priority, doing so has many long-term advantages. With good or excellent credit, you can:
Get a mortgage or auto loan with low interest
Qualify for lines of credit with the best available rates
Get a personal loan (eg. honeymoon or an advance on a major project) or business loan
Etc.
And because building credit takes time – months or even years –, starting with a credit card can be advantageous to you in the long run. After all, credit cards are among the easiest ways to get started with your credit. (They also offer variety in your credit-building journey).
Plus, you don’t have to use your credit card to build credit. If you’re not sure you can or want to handle it, you can always stuff it away in a drawer somewhere. Just be sure to activate it first so that the financial institution reports to the credit bureaus (check out this post on building credit).
Building financial literacy
If you’re interested in understanding personal finances better, the idea of having greater control over your money (and possibly credit) probably appeals to you.
With a credit card, you can start to understand how things work in the world of personal finance, loans and so forth. You can use one to start gaining responsibility over your own money, and you can use one to learn from minor mistakes.
Rewards & cashback
Major credit cards, when used responsibly, come with some awesome perks such as:
Airline or travel miles
Hotel points
Gas rebates
Complimentary access to certain things like airline clubs
Other membership perks
Choose the right card, use it regularly, and pay your balance on time each month, and you’ll get benefits you wouldn’t have had with cash or debit.
Theft protection & security
Credit cards offer a lot more security than cash. If you lose your wallet, you can report your credit cards as lost (or stolen as the case may be). But if you had $100 cash in there, that’s as good as gone.
Not only that, but if you find fraudulent charges on your credit card account, you can report or dispute them. In most cases, credit cards offer excellent theft protection with zero liability to you. That means when someone uses your account to spend $387 in menswear (and you’re a woman) at a store you’ve never shopped at, you can have those charges reversed with minimal hassle.
Foreign transaction rates & currency conversion
If you travel a lot, this one probably matters to you. Many credit cards will automatically convert foreign currency for you – at the best rates. This means no hassle travel and more savings over time.
As an added benefit, travel credit cards in particular often offer travel insurance, which is key to anyone planning on leaving the country for any period of time.
Convenience
Of course, this is another big one for most people. The convenience credit cards offer when it comes to online shopping, online bill pay, and in-person transactions is second to none.
Along with that, credit cards typically offer full online account access, meaning fewer trips to the bank and less time waiting on the phone for someone to help you.
Additional conveniences:
Making car, hotel or airline reservations
Putting down a deposit
Debt consolidation
Though not without a cost, you can use a new line of credit to consolidate debt from across several credit cards or loans. You can also transfer full or partial balances.
Why does this matter?
When done right, debt consolidation can decrease the overall interest you owe from your multiple open accounts/loans. It also puts all your debt into one convenient place so you no longer need to juggle several bills at once.
Establish a banking relationship
Anyone interested in long-term financial planning – say to purchase real estate or start up a business with an initial bank loan – would do well to establish a good relationship with their bank (or credit union).
Having 1 or more open accounts kept in good standing over a period of time (the longer the better) allows you to build more credibility for yourself. This helps when the time comes to get a bigger loan for something in the future.
The better your credit and banking history (note: they often go hand in hand), the better your chances of qualifying for a loan in the future. With the best rates.
Disadvantages of credit cards
Debt & spending limit
The first time you’re approved for a credit card feels pretty awesome. The first time you’re approved for a higher spending limit feels even better.
But spending limits can be a problem, too – and a major one at that.
Most times, financial institutions offer higher credit card spending limits without really considering the consumer’s circumstances. Automatic underwriters check things like your income (and sometimes credit score) and then preapprove or prequalify you.
The problem with this is they don’t consider how much disposable income you actually have. Just because you make, say, $50,000 a year doesn’t mean you have a surplus of money lying around. Yet, even if you need every cent to make ends meet, a bank may still offer you a line of credit with a high spending limit.
If you don’t manage it well, there’s a good chance you’ll end up in greater debt because of it. This often leads to late or missed payments and other financial problems like a poor credit score – not to mention unneeded stress.
Credit card fraud / fraudulent charges
Although credit cards offer fraud protection, it’s usually your responsibility to catch and report it first. If someone’s stolen your account information and been making fraudulent payments but you don’t notice it, you could end up the one paying for it.
The sooner you catch the fraudulent charges, the easier it is to dispute and reverse them. But the longer you wait – or the longer it takes for you to notice –, the harder it is to undo the damage to your account.
Interest rates & other fees (read the fine print!)
Credit cards – even those from reputable banks and credit unions – may come with hidden or easily forgotten fees.
The most common fees are from:
Late payments
Overdraft or over-limit
Returned payments
Foreign transactions (often around 3%)
Cash advance
Annual (for keeping the account open) or monthly maintenance
Balance transfer
APR (and deferred interest)
Always read the fine print before signing up for a credit card. If you plan to use your card for certain things – like international travel – a lot, keep in mind any associated fees (e.g. foreign transaction fees).
APR & deferred interest
Interest merits its own section because it’s the cause of a lot of problems for consumers, particularly when it comes to growing, unmanageable debt and high monthly payments.
If this is your first credit card or if you have poor credit, you’ll likely have a higher APR to go with it. Unfortunately, high APR means spending much more in total than you initially borrowed.
For example, say you charged $1,000 to your credit card (APR 19%, monthly minimum 5%) and pay only the monthly minimum payment. It could take you nearly 5 years to pay it back and you’d end up paying around $1,387 ($387 in interest alone).
This is assuming you make every payment on time and your bank doesn’t change its rates (check for fixed vs. variable APR).
Check out this handy credit card (with interest) calculator to see what you could end up owing over the lifespan of your debt.
But what about deferred interest?
Some credit cards – especially store credit cards like the one from Best Buy – offer deferred interest. This essentially means you pay 0% interest for the first X amount of time (usually 12 months), but after that all the interest you should have been paying comes at once… at the original amount.
Here’s an example:
Say you bought a computer for $1,200 on a credit card with deferred interest for 12 months. Now say you’ve made steady payments for the first 12 months and paid back $1199. If you owe even $1 after the period of deferred interest ends, you’ll have to pay 12 months’ worth of interest at the card’s new APR on that original price ($1,200).
Keep in mind that the APR can range from the single digits up to around 29% or 30% in many cases. There’s a huge difference between owing 12 months’ interest at 9.99% APR and owing it for 27.99% APR.
Good news is, if you pay off the deferred interest credit card before the time ends, you won’t owe any interest at all.
Hard inquiries & hurting your credit score
Because credit cards can be easily misused, they can lead to bigger problems like missed payments and a poor credit score.
If you fail to pay on time every time, not only will your credit score suffer but so will your chances of approval for better lines of credit or loans in the future.
A smaller but still important issue is hard inquiries. Hard inquiries are what happen when a financial institution checks your credit report to determine whether or not to approve you for a credit card (or loan). Each hard inquiry stays on your report for around a year (sometime more, sometimes less).
While having a few hard inquiries at a time isn’t bad, if you’re trying to establish credit it can hurt your score in the short-term.
You can avoid this damage though by simply minimizing the amount of credit cards or loans you apply for at a time.
Things to consider before you get a credit card
Now that you know that advantages and disadvantages of credit cards, it’s time to ask yourself why you want one. Consider such questions as:
Do I want to build or repair my credit?
Am I most interested in cashback or other rewards?
Will I be using your credit card as I travel internationally?
Is this credit card mainly for emergencies (and how often do I intend to have to use it)?
Once you know why you primarily want the card, ask yourself:
Can I manage my finances and limit, control or stay out of debt?
Will I be able to make on-time payments every time? Can I pay my monthly balance off in full?
Am I willing to check my account regularly to make sure there aren’t any fraudulent charges? And am I willing to take the time to dispute these charges?
Does a credit card equate to “free money” to me? Will I be easily tempted to spend?
Using your credit card effectively
Compare credit cards before choosing one. Each credit card has its own advantages and disadvantages, including rates, hidden or regular fees, and so forth. Never choose the first one you’re offered without first looking into it. And if it seems too good to be true… well, you know the rest.
Always pay your credit card bill on time. If you can’t pay off the balance completely, do your best to pay more than the minimum. And if you know you’ll have a positive balance in your bank account, consider setting up autopay to avoid late charges or a hurt credit score.
You can also set up text alerts or take advantage of digital budgeting tools for your credit card. Most banks and credit unions offer some variation of these – and usually for free or by being a member.
Finally, keep track of your credit card usage and available funds. If you’re starting to spend more than you wanted to on your credit card, find ways to cut back (budgeting helps).
Advantages and disadvantages of credit cards in a nutshell
Ultimately, most of the disadvantages of credit cards come from poor planning or using the card incorrectly, meaning you can often avoid the cons and get the pros instead.
But be careful. Owing money is never fun, especially when some of that money ends up being from interest.
Still, when you understand how to manage debt in small amounts (say a couple hundred dollars or so), it becomes easier to build up to bigger loans – mortgage, auto, etc.
Finding the balance between credit, debt, and income is key to planning for a bright, financially sustainable future. So if you’re just starting out, consider getting a small line of credit (say $300) and slowly working your way up.
In the meantime, keep learning about your personal finances and how to improve – and prepare – in the long run.
(Have any other credit card tips? Share them in the comments!)
Related reading:
Second Chance Credit Cards: What You Need to Know About Repairing Your Credit