Why use a credit card?

With the average credit card interest rate currently over 20 percent, you may be wondering why so many people bother using credit in the first place. This is especially true in today’s environment where credit card debt has become a major problem, and where there are other ways to borrow money that come with much lower rates and long-term costs overall.

What’s important to note is that those who truly use credit to their advantage always pay their credit card bill in full each month, so they never pay the exorbitant interest rates cards charge. The savviest card users also get a ton of benefits from their favorite rewards credit cards, including statement credits, insurance protections and even luxury travel benefits like TSA PreCheck membership and airport lounge access.

There are plenty of reasons to use a credit card over other forms of payment, including robust consumer protections and the potential to earn rewards. So, if you’re wondering why you even need a credit card in the first place, read on to learn the main ways that having one in your wallet can benefit you.

What is the point of a credit card?

Credit cards offer a line of credit to borrow against, typically with a high variable APR. Given these rates, it’s understandable that many people who use credit cards aim to pay off their balances in full every billing cycle.

When used responsibly, credit cards can help improve your credit score by establishing a history of on-time payments with the credit bureaus. Building your score in this way can help when you want to apply for a mortgage or auto loan, both by improving your eligibility for these products and decreasing the interest rate you’re likely to be charged.

There are also plenty of situations where credit cards are more readily accepted than cash, checks or debit cards. While you can rent a car with a debit card, for example, you’ll likely be charged a larger deposit and could lose some insurance protections you’d otherwise have when paying with a credit card. If you’re traveling abroad, you may find that credit cards are more widely accepted and are assessed fewer foreign transaction fees than debit cards.

Further, different types of credit cards can come in clutch in a range of different scenarios. For example, balance transfer credit cards and 0 percent APR credit cards can make it possible for you to skip paying interest for a certain period of time or consolidate your debt without interest so you can pay it down over time.

Reasons to pay with credit card vs. a debit card

Here are some of the main reasons you may want to use a credit card for spending instead of cash or debit.

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  Earning rewards

  First off, be aware that most rewards credit cards offer a welcome bonus in order to entice new users to sign up in the first place. These sign-up bonuses can easily be worth $500 or more if you’re able to spend several thousand dollars on your new cards within a few months of account opening.
  
  On an ongoing basis, rewards credit cards and travel credit cards offer travel points, cash back or flexible rewards for each dollar spent. This means that, if you’re able to pay your balance in full, you can end up “ahead” in terms of the rewards you earn.
  
  So, how much can you expect to earn with a credit card? While rewards rates vary, the best cash back credit cards offer a flat rate of 2 percent back on all purchases. That means you’ll earn $2 for every $100 you spend — or $200 for every $10,000 in purchases charged to the card.
  
  And remember, that amount is offered on top of the welcome bonuses these cards often come with. If you earn a welcome bonus of $500 and put an additional $20,000 in purchases on your 2 percent cash back card during your first year with the card, you could earn $900 on your normal spending alone.
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  Accessing perks

  The perks associated with individual cards run the gamut but can include travel perks, consumer benefits for purchases and more. For example, some of the top travel credit card benefits include:
  
  

  • Airport lounge access
  • Annual travel credits worth hundreds of dollars
  • Fee credits for Global Entry or TSA PreCheck membership
  • Automatic elite status with major hotel loyalty programs
  • Free checked bags
  • Priority boarding when flying

  Other important credit card benefits can include travel insurance benefits, cell phone protection, purchase protection against damage or theft and extended warranties. Take the time to compare perks you can get as you look over the best credit card offers available today.

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  Consumer protections

  Paying with a credit card is much safer overall than debit, generally speaking. In fact, federal law states that liability for fraudulent credit card charges is limited to $50 for consumers (even though most cards actually come with $0 liability policies for fraud).
  
  The same cannot be said for debit card purchases. In fact, personal liability for fraudulent purchases charged to a debit card climbs to $500 if you wait to report the fraud until more than two business days after you learn about the loss or theft, but within 60 calendar days after your statement is sent to you.
  
  If you report the fraud after that, your liability becomes limited to “all the money taken from your ATM/debit card account, and possibly more — for example, money in accounts linked to your debit account,” according to the Federal Trade Commission (FTC).
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  Credit building

  Additionally, credit cards let you do something that debit cards simply do not — build credit for the future. Because most credit cards report balances and payments to the three credit bureaus (Experian, Equifax and TransUnion), you can improve your credit score over time by using credit cards and maintaining healthy credit habits.
  
  To get the most out of your credit cards for credit building purposes, use them regularly, but always pay their balance in full and on time each month. If you need to carry a balance, keeping your credit utilization ratio on the low side — below 30 percent of available credit limits — is the best bet.
  
  While your credit score may not seem like a huge deal, having a good credit can help in the future if you plan to take out a mortgage to buy a home, finance a car or apply for an apartment on your own. These are just a few of the scenarios where good — or, at least, decent — credit comes in handy, and where not having a credit history can easily foil your plans.

Reasons not to use a credit card

While all the reasons listed above are good ones when it comes to using credit cards, there are reasons to not use them as well.

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  Buying things you can’t afford

  While credit cards offer a convenient way to pay for purchases while earning rewards and accessing other perks, they can sometimes make it too easy to spend.
  
  That’s why, for the most part, credit cards should only be used for planned purchases and spending when you have cash in the bank to cover the purchase. If you wind up using credit cards for items you can’t afford — racking up long-term debt in the process — you’ll likely incur costly interest charges that negate the benefits of using cards in the first place.
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  Financing purchases for the long haul (without 0 percent APR)

  Also be aware that credit cards are an expensive way to borrow money long-term unless you have a 0 percent APR credit card. Even then, it’s important to remember that intro APR offers don’t last forever. If at all possible, have a plan to pay the balance off before the offer ends and your card starts charging its regular variable APR.
  
  If you need to borrow money and pay it back over several years, consider looking into lower cost borrowing options like personal loans, home equity loans and home equity lines of credit (HELOCs) instead.

Make sure you pay in full each month

The key to benefiting from credit cards is using them responsibly — not as an excuse for overspending. This means using cards for purchases you planned to make anyway, as well as for regular expenses like groceries and gas. Most importantly, try to pay your credit card balance in full each month to avoid interest charges that’ll make everything you purchased cost significantly more over time.

Paying your balance in full each month will also keep your credit utilization low, boosting your credit score in turn. Remember that, while your payment history is most important and makes up 35 percent of your FICO scores, your balances — and the impact they have on your credit utilization ratio — are the second most important factor, accounting for 30 percent of your scores.

The bottom line

You don’t have to use a credit card if you don’t want to, and there are definitely situations where consumers are better off without one. If you have a history of overspending or a habit of forgetting about bill payments, it’s possible a credit card could leave you a lot worse off over the long run.

But if you’re able to use a credit card responsibly and avoid debt, you have a lot to gain from using credit over debit. By paying off your credit card balances in full each month and not using credit as an excuse to overspend, you can earn rewards on every purchase, access useful cardholder perks and secure more consumer protections for everything you buy.