Key takeaways

  • With careful use, credit cards can help you build your credit and accumulate valuable benefits and rewards. Plus, you’ll enjoy protection against unauthorized charges.
  • However, interest rates are high, and if you don’t pay on time and in full you can accumulate debt and even hurt your credit score.
  • Make sure to choose the right card for you and practice good habits to enjoy credit cards’ advantages and avoid their downsides.

Responsible credit users know: Using a credit card can be one of the best ways to save money and even improve your overall financial health.

When you’re approved for a credit card, the card issuer will extend you a line of credit. This isn’t free money; it’s the amount up to which you can charge your card. Every month, when your billing cycle ends, you’ll need to pay down that balance, or else it will begin to accrue interest at your assigned interest rate.

These high interest rates, and how quickly they can result in mounting debt balances, are some of the biggest downsides of credit cards. But if you can pay your balance down in full and on time, there are plenty of benefits too — like the convenience, valuable perks and rewards and added consumer protections.

If you’re considering applying for a new credit card, here are some pros and cons to consider and ways you can ensure you reap the benefits of credit cards while minimizing any drawbacks.

Pros and cons of credit cards

Used with care, the best credit cards come with benefits and convenience — but there are risks, too.

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  • Build credit over time with responsible use
  • Enjoy added security thanks to consumer protections
  • Earn benefits and rewards with the right card
  • Get protection against theft and damage on purchases
  • Pay off debt or large purchases with 0 percent APR deals
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  • High interest rates
  • Many possible fees, including some you can’t avoid
  • Potential credit card debt if you don’t pay in full
  • Bad credit habits can hurt your credit score
  • Deferred interest can be costly

Credit card pros

These are some of the best ways for anyone to get value from their credit card use:

Build credit

Credit cards are some of the best tools to build credit over time. Your credit score will have a big impact on your financial life.

With great credit, you’ll be more likely to qualify for loans you may need in the future, such as auto loans and mortgages. A good credit score can also help you get more favorable terms on money you borrow, so you don’t pay too much in interest over the lifetime of the loan.

To build credit using a credit card, it’s important to pay at least the minimum amount due by your due date each month. Credit card issuers report your account activity to the three major credit bureaus on a monthly basis, so you’ll want to build a consistent record of positive information. This means avoiding making late payments, not spending up to or past your credit limit (to keep a low credit utilization rate) and not applying for new credit too often.

Added security

When it comes to day-to-day spending, credit cards are a great option thanks to the added consumer protections offered.

Most credit cards come with zero-liability fraud protection on unauthorized charges, as long as you report the charges within 30 days. Even if your issuer doesn’t give you zero liability, the Fair Credit Billing Act limits your total liability for unauthorized charges to just $50.

What’s more, if unauthorized charges are made on your credit card account, you may be able to resolve the issue before your balance is due and actual money is lost. If your debit card information is stolen, on the other hand, it can take much longer to resolve the problem since you’ll need to wait for the funds to be returned to your bank account.

Benefits and rewards

If you have the right credit card in your wallet, you can earn cash back, points or miles on your most frequent purchases. When you open a new rewards credit card, you’ll also have the chance to earn a welcome bonus after meeting a certain spending threshold.

The best way to benefit from credit card rewards is by choosing a credit card that aligns with how you spend most. For example, frequent travelers might benefit most from a travel credit card that earns points or miles toward future travel and comes with benefits like lounge access and credits toward known traveler programs like TSA PreCheck. On the other hand, you might get more value from a cash back card with bonus rewards on everyday spending categories like grocery stores and gas stations.

Added benefits can go a long way, too. These can include travel protections, no foreign transaction fees, annual statement credits toward certain purchases, savings with specific partner brands and much more.

Purchase protection

Purchase protection is another hidden perk you’ll find on most credit cards. It applies to items you purchased with your card. If the purchased item is stolen or damaged within a certain period — typically 90 to 120 days — you can receive a replacement or reimbursement.

Be aware that you typically have an annual or lifetime limit on this bonus, along with a per-claim limit. Certain kind of purchases, such as motorized vehicles, antiques and used items, may be excluded.

Potential break from interest

Some credit cards advertise a 0 percent introductory APR (annual percentage rate) offer. Cardholders can avoid interest charges on qualifying balance transfers, new purchases or both for a promotional period — typically 12 to 21 months. When used correctly, the best 0 percent APR cards could help you pay off high-interest debt or pay for a large purchase over time.

But make sure you understand the offer’s terms and plan how you’ll handle repayment. You don’t want to end up deeper in debt when the introductory offer ends. And if you fail to make minimum payments, the issuer might revoke your promo rate and hit you with a sky-high penalty APR.

Credit card cons

While credit cards offer a lot of added value to your spending, there are risks to using them, too. Here are a few to keep in mind before you apply for a new card:

High interest rates

Credit cards have notoriously high interest rates. Right now, the average credit card interest rate is just over 20 percent, though some cardholders carry APRs even higher.

Most credit cards have variable interest rates, meaning the rates change over time. Many issuers base their rate on the benchmark prime rate plus a margin. And the prime rate has been going up as the Federal Reserve tries to tackle inflation, meaning that for now, credit card interest rates are continuing to climb.

Potential fees

But interest rates aren’t the only costs you can incur with a credit card. Many card issuers charge late fees, foreign transaction fees, balance transfer fees and more. Make sure you read the terms and conditions of your card agreement so you know exactly what fees you may encounter, and how to avoid them.

Many of the most premium rewards and travel credit cards also charge an annual fee, which you’ll pay each year just for the privilege of having the card. You can often offset the cost of this fee with the value you’ll get from rewards and benefits, but you should make sure your budget allows you to do so before you apply. You may also want to consider a no annual fee credit card that still offers value on your spending.

Potential credit card debt

Your APR is the amount of annualized interest you’ll take on if you carry a balance on your credit card and don’t pay it down in full each time your balance is due.

With credit card interest rates near or above 20 percent, it’s more important than ever to avoid taking on credit card debt. By spending only what you can afford to pay off and paying your balance in full each month, you can avoid the pitfalls of credit card debt.

If you tend to overspend, create a budget and track your spending closely throughout the month. You can use your credit card like it’s a debit card, and budget only what you have in the bank and know you can pay down at the end of your billing cycle. That way, you won’t be caught off guard by extra spending when it’s time to pay.

Deferred interest

Some co-branded cards and store cards — which grant rewards when you shop with a particular store or brand — promise financing without interest charges for a promotional period. But don’t get these offers confused with 0 percent APR credit card deals. The issuer will keep track of interest on your purchases from the moment you receive the card. If you don’t pay your entire balance by the promotional period’s end, you’re on the hook for all of that interest.

By comparison, 0 percent APR cards only charge you interest on the balance you carry when the intro APR period ends. Spot deferred interest promotions by looking for language like “no interest if paid in full” or promises of no interest for a certain number of months. Missing these cues or failing to pay your full balance before the promo period ends could be a costly mistake.

Can hurt your credit score

While there are plenty of ways to build credit with a credit card — positive payment history, keeping a low credit utilization and adding to your credit mix, among others — you can also hurt your credit score with bad credit habits.

For example, going over an ideal credit utilization could have a negative effect on your score. Experts typically recommend using under 30 percent of your available credit. If you have a credit limit of $5,000, that means keeping your balance under $1,500.

Applying for multiple credit cards at once can also bring down your score, at least temporarily. Each time you apply for credit, the issuer makes a hard credit inquiry, which can make your credit decrease by a bit. Applying for many new accounts at once can also be a red flag to lenders and make you look less creditworthy than if you leave more time between your applications.

Of course, another way you can negatively affect your credit score is by making late payments or not paying at least the minimum amount due toward your balance. When your issuer reports these practices to the credit bureaus, you could see the impact on your credit score, especially if you do so over longer periods of time.

The bottom line

Credit cards are a great financial tool to have in your portfolio — when used carefully. Not only can you build a great credit score with a credit card, but the right card can help you save money on your regular spending and get more value from added benefits.

Once you’ve decided you want to get a new credit card, there are a few factors that can help you choose the right card for you. These include the card type and any rewards offered, the interest rate you’ll be assigned and other fees you could take on, among other card details.

Just remember: Credit cards can also get costly very quickly. It’s important to always practice good credit habits and avoid spending more than you can afford to pay off whenever you use your card.