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If you talk to the average person about credit cards, they will speak about them as negative things.
And if you aren’t smart with your spending, they can get you into a lot of financial trouble.
In some cases, they can even destroy your finances to the point of bankruptcy.
But if you are careful with your spending, credit cards can make a lot of sense.
They offer purchase protection and rewards, among other things.
In this post, I am highlighting the most important pros and cons of credit cards.
Before you make the decision to start using this form of payment, make sure you understand everything about credit cards.
Table of Contents
10 Important Pros And Cons Of Credit Cards
5 Advantages Of Credit Cards
There are many benefits of credit cards.
Here are the 5 biggest to consider.
#1. Earn Credit Card Rewards
When you shop using plastic, depending on the type of credit card you have, you can earn rewards.
The two most popular types of credit cards are cash back credit cards and travel rewards credit cards.
With cashback rewards, you earn a percent of cash back for every dollar you spend.
Some cards offer a flat 1% or 2% cash back.
Others offer varying amounts of cash back depending on where you are spending money.
You can redeem the cash back you earn for statement credits or request money be transferred to your checking account.
With travel rewards cards, you earn rewards points for every dollar you spend.
Typically you earn 1 point per dollar spent, but some cards offer more points.
You can redeem your points for free or discount airfare, hotel stays, and other travel.
With some cards, you can transfer your points into airline miles with your preferred airline.
If you are smart with your credit card purchases and do not go into debt, you can make money by paying with your card.
For me, I only use cash back cards and average $1,500 a year in cash back.
And since I pay my bill in full each month, I never pay interest.
So in effect, the credit card company is giving me free money for using their card.
#2. Build Credit History
Having a strong credit history is important to getting low interest rates on loans you take out.
This includes mortgages, an auto loan, personal loans, student loans, and others.
And getting low interest rates can save you tens of thousands of dollars over the life of your loans.
- Read now: Click here to learn how to improve your credit score
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Additionally, having a solid credit report can get you lower premiums on your auto insurance, and help you get a job.
The key is making sure you never make any late payments or pay any late payment fees.
If you can consistently make your monthly payments by their due date, you will build your credit history.
#3. Pay Over Time
While credit cards charge absurdly high interest rates, you do have the ability to pay for larger purchases over time.
Again, this is not recommended to be a regular thing as the interest you pay will push you further behind financially.
But we all have moments in life where money gets tight and we simply cannot pay our bill in full.
The option to pay the minimum payment for a month or two is definitely a benefit while we get things sorted out.
#4. Extended Warranty
Paying with plastic offers additional protection than if you paid in cash.
For example, some cards automatically extend the warranty of some products you buy.
Many times this warranty adds an additional 2 years to the standard warranty.
And best of all, it is free and included automatically.
You can skip paying for the store extended warranty and don’t have to deal with all the fine print either.
#5. Added Benefits
As great as having an extended warranty is, there are other perks as well.
For example, many cards offer an extended return period that is longer than the retailer’s standard return policy.
In the event you have an issue with the return, you can dispute the issue with your card company and have them handle the issue, saving you time and headaches.
And there are other benefits as well.
- Purchase Protection
- Price Protection
- Cellphone Insurance
- Roadside Assistance
- Rental Car Insurance
- Built-in Travel Insurance
- Concierge Service
- Airport Perks
- Exclusive Live Event Access
These are just the most common benefits offered.
Make sure you check with your credit card company as your card might offer additional perks.
5 Cons Of Credit Cards
As great as the benefits are, there are drawbacks to credit cards.
Here are the ones you need to pay special attention to, otherwise you could end up in financial trouble.
#1. Potential For Credit Card Debt
The major disadvantage to using credit cards is carrying a credit card balance.
It is very easy to overspend and get yourself into debt.
This is because there is no emotional attachment when it comes to swiping your card.
You can spend all day without realizing just how much money you are spending.
When paying with cash, you see the money in your wallet slowly dwindle and know that you need to cut back.
And even with debit cards, you can only spend a certain amount per day before hitting a limit.
As a result, you need to understand your spending habits when using credit cards.
I recommend you start off slowly and only charge a few things per month.
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When I got my first credit card account, I only made a couple everyday purchases on it a month.
Then when the monthly statement came, I wasn’t surprise with the amount I owed.
While the goal was to build my credit, I also simply wanted the credit card if an unexpected expense came up.
Since then, I now use my credit card for most things I buy, even large purchases.
Once you get more comfortable, you can charge a few more things.
All the while, you need to be logging into your account and seeing what your balance is so there is no surprise when you open your credit card statement in the mail.
#2. Possibility For Fraud
Credit card fraud is one of the fastest growing crimes out there and chances are you’ve been a victim or will become one.
The good news is you are never held liable to pay for fraudulent charges made with your card.
But it is still a hassle to have to call and report the fraud.
Then there is the worry about if the criminal only has access to this one card or has your entire identity.
Everything that happens, from a phone call from an odd number to a spam email has you worried that your financial life has been compromised.
Because of the worry and hassle, this is one of the biggest downsides to credit cards.
#3. Credit Card Fees
Not all cards charge an annual fee.
But many do and over time, the annual fees you pay add up.
Just paying a $95 annual fee for 20 years ends up being $1,900.
And you pay this fee even if you never pay interest on your balances.
If you decide to shop using plastic, either as your primary form of payment or an occasional one, make sure you find no annual fee cards.
There are plenty of them and they all offer competitive rewards.
You can click the link below to find one for you.
And there are additional fees credit cards charge as well.
If you are late with a payment, there are late fees.
There are higher interest charges on cash advances.
These are all in addition to the interest rate you are charged if you only pay the minimum amount each month.
#4. Credit Score Damage
If you carry a lot of high-interest debt, you can hurt your credit score.
The main reason here is a high debt to credit ratio.
If lenders see you are close to maxing out your credit, they might think you are overspending and getting into financial trouble.
Additionally, if you don’t make your credit card payments on time, you can hurt your credit score as well.
As I mentioned earlier, a higher credit score is key to saving thousands of dollars on loans because you will be getting a lower interest rate.
So make sure you don’t overspend and be sure to pay your bill on time every month.
#5. Credit Card Surcharges
Another of the disadvantages of credit cards is their surcharges.
You can and usually do pay more for things when you shop using your card.
This is because credit card companies charge surcharges to merchants for every transaction.
Most times this surcharge is 0.50% to 2.0%, but it can be higher.
And most retailers don’t simply pay this fee. They pass it on to you.
In most cases, you don’t see this as the fee is included in the overall price of the item.
But in some cases you do see it.
The most common place is at gas stations. You will see the cost for a gallon of gas is $3.25 but if you pay with cash, your cost is $3.15.
The difference in the pricing is the processing fee the credit card company is charging the merchant.
At the end of the day, there are many pros and cons to credit cards.
In my opinion the advantages outweigh the drawbacks, assuming you are responsible and pay off your balance in full every month.
If you can do this, credit cards are a great way to not only pay for the things you need, but also to earn cash back and points to save on travel expenses.
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I have over 15 years experience in the financial services industry and 20 years investing in the stock market. I have both my undergrad and graduate degrees in Finance, and am FINRA Series 65 licensed and have a Certificate in Financial Planning.
Visit my About Me page to learn more about me and why I am your trusted personal finance expert.