When you tally up the pros and cons of credit cards, a couple of things are clear. There are many reasons to use a credit card, from convenience and credit building to 0% financing and rewards. But considering how easy it is to overspend with a credit card, how expensive credit card debt can be and how missed payments can hurt your credit score, there’s also reason to be cautious. We rack up billions of dollars in credit card debt each year, for example. And anytime you’re 30+ days late on a payment, it’s noted on your credit report for seven years. Most importantly, though, the advantages of credit cards vastly outweigh the disadvantages for most people. You don’t even need to make purchases with a credit card to benefit. Just educate yourself on what to do and what not to do, and you’ll be alright.
With that in mind, WalletHub put together a list of the biggest pros and cons of credit cards to help you make the most of the positive features while steering clear of the pitfalls. Hopefully, this will make it clear why responsible credit card use is a no-brainer.
Here are the biggest pros and cons of credit cards:
Below, you’ll find explanations for each of the top pros and cons of credit cards. You’ll also see some bonus pros, as the advantages of credit cards outweigh the disadvantages when you use them right.
Top 15+ Pros of Credit Cards
- Credit Building – Credit card companies relay account information to the major credit bureaus on a monthly basis. This allows you to build a solid credit history or rebuild after mistakes fairly quickly. You don’t even need to use your credit card to benefit. As long as you have an open account that is in good standing, positive information will fill your credit reports.
- Convenience – You don’t want to always carry cash around, especially not enough to make big-ticket purchases. Not only is a credit card easier to conceal and carry, but it’s also a lot easier to keep tabs on a card than the exact amount of cash you have with you. In the unfortunate event your credit card is lost or stolen, you aren’t liable for any unauthorized charges and therefore aren’t out any money. You can’t say the same for cash.
- Rewards – Whether they’re in the form of cash back, airline miles, hotel points or gas rebates, many credit cards provide rewards that not only help subsidize the cost of purchases, but also provide certain unique amenities. By signing up for a rewards credit card, you are effectively joining a group for which membership has its perks. For example, some cards provide discounts and exclusive access to shows, ball games and concerts; VIP treatment in airports and hotels; concierge services; special gifts; and much more.
- Grace Period– You have at least 21 days from the time you receive your credit card bill each month to pay it. This means that if you pay your bill in full every month, you may have up to 51 days (21-day grace period + 30 days in a billing cycle) before you have to pay your credit card issuer back for the purchases you make.
This not only helps your cash flow, but also comes in handy in the rare event that you detect unauthorized charges on your account. A credit card gives you a substantial buffer to sort out any problems before they truly affect your bank account and the rest of your finances.
- Pay Over Time – Credit cards give you the ability to buy now and pay later, even over the course of months or years. Plus, many credit cards offer 0% introductory APRs. Using such a card for a big purchase can save you a bundle on interest, as long as you pay off your balance before regular rates take effect.
- Theft Protection – Credit cards have $0 liability guarantees, meaning you won’t lose any money if your card gets lost or stolen. What happens with cash in such an instance?
- Online Shopping – You may be able to use other payment methods to buy things online, including debit cards, prepaid cards, gift cards and PayPal. But credit cards are best suited to the task. Virtually all merchants accept credit cards, which also happen to have both the best fraud protection and the most generous rewards.
- Hotel & Rental Car Reservations – It’s possible to rent a car or hotel room with a credit card. But credit cards make it easier and less expensive. Car rental companies and hotels typically place a hold on your account for incidentals. And it’s better to have your credit line tied up than the actual money in your bank account. Plus, booking with a credit card allows you to earn rewards and take advantage of any travel insurance your card might offer.
- Balance Transfers – Using a 0% balance transfer credit card can help you drastically reduce the cost of what you owe and get out of debt much sooner. It doesn’t have to be credit card debt, either. Some credit card companies let you transfer balances from various types of loans.
- Travel Insurance – Credit cards provide insurance against cancelled trips, missed connections, lost luggage, and even death. The amount of coverage you get depends on the card you have, so make sure to look into the details before traveling.
- Cheap Currency Conversion – Credit cards do the conversion automatically when you make an international purchase. And they provide some of the best exchange rates possible. By using a Visa or Mastercard with no foreign transaction fees when traveling abroad, you’ll save up to 8% compared to popular options for exchanging hard currency. Just make sure to steer clear of dynamic currency conversion.
- Improving Financial Literacy – Credit cards are an important aspect of teaching your kids financial literacy. If used correctly by parents, credit cards can be an excellent tool for teaching kids to not spend beyond their means, even if given the temporary ability to do so.
- Expense Tracking – Credit cards make it easier for anyone to track their spending over time. This pays dividends when it comes to household budgeting, cash flow management, and more.
- Small Business Perks – Business credit cards provide a number of helpful features tailored specifically to the needs of small business owners. They include more rewards on things like office supplies and telecommunication services. You also get robust expense tracking tools, plus the ability to give employees cards with customizable limits whose rewards you keep.
- Car Rental Insurance – Credit cards automatically provide supplemental rental car insurance, which covers you in the event of damage or theft. That means you don’t need to buy the insurance the rental company offers. In fact, if you do buy it, the coverage your card provides will be nullified.
- Extended Warranties - People often waste money on extended warranties, not knowing their credit cards provide that perk for free.This is "yet another reason why consumers should generally avoid buying extended warranties", said Ahmed Taha, a professor at the Pepperdine University School of Law. "They tend to be very bad deals for consumers"
- The CARD Act (applicable only to consumer credit cards) – The Credit CARD Act of 2009 made using a credit card a whole lot safer. It’s the reason you no longer need to worry about excessive fees. And it’s why your balances won’t suddenly become more expensive without cause. It only applies to credit cards for personal use, though.
Top 10+ Cons of Credit Cards
- Overspending and Debt – When we make purchases with a credit card, there can be a tendency to spend more than we would have with cash. It’s a fairly basic concept – when our payments aren’t tangible, they don’t feel real. And this is especially true if we know we won’t have to deal with the bill for weeks to come. Many people also make the mistake of viewing their credit cards as supplemental forms of income, which leads them to shop based on their desires rather than necessities. Doing so can lead to dire consequences, rendering the credit card a burden rather than an advantage.Of course, habitual overspending with a credit card will inevitably leave you saddled with some very expensive debt. And from there, it is easy to find yourself unable to make monthly payments, putting you at risk for delinquency, collections, or even a lawsuit.
- High Interest Rates – Credit card APRs are high compared to most other interest rates you’ll come across. For example, the average APR on a new credit card offer is roughly 19%, according to WalletHub’s latest Credit Card Landscape Report. A 30-year fixed rate mortgage, on the other hand, charges about 4.5%, as of February 2018. That’s why you should pay credit card balances in full whenever possible.
- Fees – The average credit card charges an annual fee of about $16, which isn’t terrible. Besides, it can be worth paying an annual fee to get better rewards. But other fees are just a costly nuisance that should be avoided. They include cash advance fees, account overdraft fees and foreign transaction fees.
- Fine Print – Credit card application disclosures are notorious for being difficult to read. But you have to review them to avoid surprises such as increased interest rates or unexpected fees.
- Vague Approval Requirements – Credit card companies will tell you that approval is based on your credit history, income and debt. You might even know the minimum level of credit (i.e. Excellent, Good, Fair, Limited or Bad) that’s required. And some issuers give you the opportunity to check for pre-approval before you apply. But other than that, you’re pretty much flying blind, without much in the way of specifics.
- Fraud – You’re assured $0 liability for unauthorized transactions made with your account. But disputing the charges can be a hassle. Fraud can also cause temporary damage to your credit report if it causes you to miss payments. So it’s important to protect your personal information and check your credit card statements for errors each month.
- Deferred Interest Financing – It’s become common practice for retailers to advertise 0% introductory interest rates for extended periods of time, with a catch called deferred interest. If you don’t bring your balance to zero by the end of the 0% intro period, or you’re late with a monthly bill payment along the way, the 0% rate goes away. Worse still, interest retroactively applies to your entire original purchase amount at a high rate. It’s like the 0% rate was never there. So you go from thinking you’ll save a lot of money to paying through the nose.At the very least, this means you need to be very careful with retailer financing offers. But it’s important to note that general-use credit cards with 0% APRs don’t use deferred interest. Those are cards with a Visa, Mastercard, American Express or Discover logo.
- Toxic When Misused – Credit cards are the best tools available for credit building. They’re fairly easy to get; they can be free to use; and they report account information to the major credit bureaus each month. But monthly credit-bureau reporting represents a fork in the road. It’s an opportunity to either build your credit or ruin it, depending on how responsibly you use your card. If the information is negative, including missed payments and high credit utilization, for example – your credit score will suffer.Credit score damage will cost you money as well as make it harder to get good rates on future loans, apartments, credit cards, etc. Past-due balances can also lead to collections accounts and even lawsuits.So the repercussions of serious credit card debt are pretty severe.
- Short-Term Credit Hit– Each time you open a new credit card account, your credit standing will take a short-term hit, lasting a few months. It’s therefore a good idea to never open a credit card right before you need the best credit score possible, such as if you are applying for a loan.
- No Business CARD Act–Unlike consumer credit cards, business credit cards lack the protection of the CARD Act. Most importantly, this means creditors can increase the interest rate on business-card balances whenever they want. Fortunately, some issuers have proactively extended certain parts of the CARD Act to their business-branded products.
- No Preset Spending Limit– Some credit cards have spending limits that can change monthly based on your usage habits and the economic environment. They’re known as No Preset Spending Limit credit cards. Such cards make it difficult to manage your credit line and plan expenses. The way they report information to the major credit bureaus can also make it seem like your credit utilization is higher than it really is. That can cause undue credit score damage.
- Household Income System – The CFPB’s decision to allow the use of shared income on credit card applications was viewed as a significant victory for stay-at-home parents. But the ruling also makes it harder for credit card companies to judge how much spending power to give us. Because applicants only have to list individual debts, credit card underwriters can’t determine how much disposable income a person really has.
In other words, someone could list their combined income with a spouse, along with their personal debts, on a credit card application. But what if the spouse already owes a lot of money? There wouldn’t be as much left over to pay for that new credit card. And that would increase the odds of delinquency and default.
Credit cards have their downsides, to be sure. But they also have plenty of positives and do more good than harm at the end of the day. When used responsibly, a credit card can help you build the credit history needed to buy a home or a car. It can lower the price of everything you buy, thanks to rewards. And it provides everyday convenience. Furthermore, the credit card market is as consumer friendly as it’s ever been, thanks to the CARD Act.
As a result, it’s not really a question of whether you should use a credit card, but rather how you should use it. So for your convenience, we’ve put together a list recapping the biggest pitfalls to avoid and perks to seek out.
Top 5 Pros and Cons of Credit Cards
|Pros of Credit Cards||Description||Cons of Credit Cards||Description|
|Credit Building||Major credit cards report to the credit bureaus monthly.||Overspending and Debt||Credit card purchases don’t always feel as real as cash.|
|Convenience||You don’t have to worry about carrying cash.||High Interest Rates||The average APR for a new credit card offer is about 19%.|
|Rewards||Other payment methods just can’t compare rewards-wise.||Fees||The average credit card offer has a $16 annual fee and a 1.6% foreign fee.|
|Pay Over Time||You’re able to buy necessities without saving all the cash first.||Fine Print||Credit card ads don’t always tell the full story, and the fine print is tough to read.|
|Theft Protection||Credit cards have a $0 fraud liability guarantee.||Vague Approval Requirements||It can be hard to find the right card for your needs.|