The pros and cons of credit cards

Credit cards can offer a convenient way to pay for everyday purchases, like groceries, and come handy in an emergency.

While it’s easy to get excited about the convenience and perks credit cards can provide, it’s also important to be aware of the potential risks of overspending and high interest charges. Understanding the advantages and disadvantages of credit cards can help you decide if a credit card makes sense for you.^[1]   

What are the pros and cons of credit cards? 

To determine whether using credit cards is the right move for you, here’s a closer look at some of the top credit card pros and cons.  

Pros of using credit cards

There are a lot of reasons to consider using credit cards in your everyday life. Here are some of the more prominent benefits of using credit cards that can add value to your financial life. 

Convenient payment method 

There was a time when cash was king, and it was difficult to use credit cards. Now, the opposite is true. If you use a credit card for a good chunk of your spending, you don’t have to worry about always having cash on hand, and you can even add your credit card to a digital wallet for additional convenience. And if you travel, you don’t have to worry about finding an ATM or converting your currency as long as the local merchants accept your credit card’s payment network.^[1] 

Good way to build credit 

One of the keys to building solid credit is a history of on-time payments, and prudent use of a credit card is an easy way to do that. In fact, if you use a credit card for modest purchases each month, keeping your balance relatively low compared to your credit limit, and then pay off the balance in full by your monthly due date, you can build credit without paying interest charges.^[2] 

No interest when monthly balance is paid in full 

Credit card interest rates can make the cost of borrowing expensive—and interest charges can add up quickly. For some credit cards, if you pay off your balance in full by the due date each month, you won’t be charged interest. To avoid getting caught in a cycle of debt with high interest costs, only put charges on your credit card that you know you can pay off at the end of the cycle.   

Paying off a charge immediately after using the credit card can also help you avoid interest. For example, if you regularly spend $50 on your rewards card to fill up your gas tank, transfer a $50 payment to such credit card immediately from your checking account.^[3]   

Fraud protection on unauthorized purchases 

Most major credit card issuers offer zero-liability protection on unauthorized charges. If you spot and dispute unauthorized charges before you pay your monthly bill, you may withhold payment for the disputed charge as long as the dispute is upheld. Also, credit card technology has improved to the point where if you use your card’s chip or tap to pay, the transaction is encrypted to help prevent hackers from stealing your card information.^[4] 

Potential for rewards, discounts, or cash back 

Many credit card companies frequently offer rewards with every purchase you make, or on certain types of purchases. Depending on the rewards program, you could get cash back, or you could earn points or miles and redeem them in a variety of ways, such as travel, gift cards, online shopping, and more.  

Some credit cards also offer sign-up bonuses to new cardholders after you meet a minimum spending requirement. You might even receive additional perks, such as cell phone protection, travel insurance, travel or dining credits, and more.^[5]  

Cons of using credit cards 

While there are some clear benefits to using credit cards, there are also some inherent risks that can damage your credit and threaten your financial well-being. Here’s what to consider. 

Potential for overspending 

It can be tempting to put a purchase on your credit card, however it’s still important to budget for the expense and be sure you can pay your bill in full to avoid interest. If you’re prone to overspending, you could end up spending more than you can afford to pay back or rack up costly interest charges.   

Usage may negatively affect credit  

How you use your credit cards plays a large role in your credit score calculations. In particular, your credit utilization rate is one of the most influential factors in your FICO score. This rate is calculated by dividing your card’s balance by its credit limit, and it’s done for each individual card, as well as for all of your accounts.  

For example, if you have a $2,500 balance on a credit card with a $10,000 limit, your utilization rate on that card is 25%. If you have three credit cards with a combined balance of $6,000 and a combined limit of $15,000, your credit utilization rate for all accounts is 40%.  

Generally, a lower credit utilization is better for your credit versus a higher one. If your utilization rate gets too high, it could negatively impact your credit score until you pay down the balance. This can even be true if you pay your bill in full every month, so keep an eye on your balances and consider using your cards less or making multiple payments throughout the month to keep your credit utilization rate low.^[2] 

High interest rates 

Carrying credit card debt can be expensive thanks to high interest rates. Since 2022, average credit card rates have reached a record of high 21.76%, according to the Federal Reserve. Data from a recent LendingClub Bank study reports that almost half (47.1%) of Americans are unaware of the current APR on their credit cards, and 49.5% are unaware that their credit card APR automatically rose by over 5 percentage points following the Federal Reserve’s rate increases between March 2022 and July 2023. 

When using a credit card, it’s important to pay your balance in full by the due date every month to avoid paying interest. Carrying debt can limit your opportunity to achieve your other financial goals.  

May have fees  

Some credit cards have annual fees, which can range from around $50 a year to several hundred dollars. For example, certain travel cards have annual fees of $500 or more. While this type of rewards card may come with many perks for frequent travelers, it may be a waste of money for some.

If you don’t pay your bill on time, you may also be hit with a penalty late fee and a higher interest rate. Credit card issuers may charge fees for other services like balance transfers or cash advances. It’s important to understand what fees a credit card has before applying, so be sure to read the fine print when researching cards.^[6] 

Credit limits vary  

The amount you’re able to charge on your credit card depends on your credit limit. Credit card limits are set when you first open the card. People with good credit generally qualify for higher credit limits than those with poor credit—and the difference can be thousands of dollars.  

For instance, if you’re new to credit or working on rebuilding your credit, your credit card could have a spending limit of just a few hundred dollars, compared to someone with excellent credit who may have a $10,000 limit. If you demonstrate a solid payment history and keep your spending in check, you may be able to request a credit card limit increase. However, in some cases, your credit limit could be reduced if you rarely use the card or your credit situation changes.^[7]  

What else to consider about credit cards 

When used responsibly, credit cards can provide a lot of value, and you may even be able to avoid some or all of the potential drawbacks. However, if you’re concerned about going into debt or paying unnecessary fees and interest, they might not be worth it. Before applying, take the time to consider why you want a credit card and how using one might affect your financial well-being.  

Think carefully about your situation, spending habits, and preferences to determine the right path for you. Spend time considering whether a credit card is a financial tool that makes sense for you. Evaluating credit card issuers, rewards programs and perks, and how the card can help move you toward your financial goals is a key part of making the right decisions for your wallet. 

The bottom line  

Like most financial tools, credit cards aren’t inherently good or bad. Used properly, they can help you build a strong credit profile and give you access to appealing perks and rewards. On the other hand, they can lead to overspending, excessive interest charges, and potential damage to your credit score.  

If you decide to use credit cards, be mindful of your usage and be diligent about reviewing your spending. Your vigilance can help you enjoy the benefits while limiting the risks. And If you’ve built up more debt than you can handle, a personal loan may help you consolidate your credit card debt and save you money on interest over time.    

1. FDIC. “Credit Cards - General Overview.” 

2. Consumer Financial Protection Bureau. “How do I get and keep a good credit score?” 

3. Consumer Financial Protection Bureau. “How does my credit card company calculate the amount of interest I owe?” 

4. Consumer Financial Protection Bureau. “Am I responsible for unauthorized charges if my credit cards are lost or stolen?” 

5. Consumer Financial Protection Bureau. “Credit Card Rewards.” 

6. Consumer Financial Protection Bureau. “CFPB Bans Excessive Credit Card Late Fees, Lowers Typical Fee from $32 to $8.” 

7. Consumer Financial Protection Bureau. “Why did I get a low credit limit on a credit card?”