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When used responsibly, the advantages of credit cards are nearly endless. In fact, credit cards are actually one of my favorite personal finance topics to talk about because of all the great benefits they offer.
Credit cards are one of those things that get a bad reputation because of the horror stories you hear about consumers racking up insurmountable amounts of credit card debt. Don’t get me wrong, those horror stories are real and scary, but it’s also fairly easy to avoid getting caught in a bad situation.
When you use a credit card the right way, you can take advantage of all the perks and rewards that they offer.
Using it the right way really just means paying it back on time and in full every month. You’ll hear me say that a few times, because, well, it’s just that important.
Before diving in, we’ll level set on what defines a credit card. If you’re already an expert, go ahead and skip to the next section.
What is a Credit Card?
A credit card, quite literally, is a small plastic (or increasingly metal these days) card that you can use to take loans from a bank or institution throughout the month in order to make payments. That’s right, each payment you make on a credit card is essentially a small loan.
Then, at the end of the month, you receive a statement from the bank outlining the amount of money you loaned from them. Not surprisingly, you must then pay back this amount.
The catch is, unlike regular loans, there is no interest if you pay back your balance on time and in full, every month. However, as soon as you start missing payments, the interest charges start kicking in.
Unfortunately, unlike regular loans, the interest on credit cards is insane. Yes, insane. It could be 15% or higher. More on that later in the article.
On the bright side, what we’ll get into next are the advantages of using a credit card. Not only do credit cards allow you to defer payments until the end of the month, but they also give you a variety of rewards, perks and other benefits that make them extremely useful for consumers.
Advantages of Credit Cards
As mentioned, there are countless advantages to using a credit card. We did our best to narrow it down to the top 10; the most important credit card benefits.
Let’s get right into them.
1. Cash Back and Point Rewards
The first and most obvious advantage of credit cards is the cash back, rewards programs, and frequent flyer miles that they offer. You’re essentially buying everything on sale!
Even the most basic cash back credit cards will offer at least 1% cash back on all purchases. For an average consumer who spends $10,000 a year, that’s $100 back in your pocket for doing nothing except using your credit card.
Plus, that’s just the beginning.
Premium credit cards with annual fees offer rewards programs that are even more generous. Usually, they’ll offer more points for spending in certain categories or when redeeming for specific rewards. Kind of a vague sentence, but it’s best explained with an example…
…the Chase Sapphire Reserve is a good credit card that offers 3x points on dining and travel spending. Plus, they’ll multiply your points by 1.5x when you redeem them in their travel portal (to buy flights, hotels, etc.). That means you could be getting 4.5x points (3 x 1.5) every time you eat out!
Not a bad return for simply using a credit card.
To be fair, there is a hefty fee associated with this card, but our credit card tool can help you figure out if the benefits of this card (and the Chase Ultimate Reward Points that come with it) outweighs the cost.
View the Best Credit Cards:
2. Sign-Up Bonuses
On top of offering great cash back and rewards when you spend money, a lot of credit cards will offer you a one-time bonus just for signing up.
It makes you feel like a professional athlete finally signing their big contract!
Well, maybe not – it’s not going to be the multi-million dollar sign-up bonus you’ve been dreaming of, but, it is usually worth a few hundred bucks.
That’s certainly better than nothing!
View the Best Credit Cards:
3. Secondary Perks
Another one of the important advantages of credit cards is the secondary perks that credit cards may offer. These are perks that don’t offer a direct monetary value, like cash back.
No annual fee cards offer less of these secondary perks, but common ones to look for would include:
- 24/7 Customer Service.
- No Foreign Transaction Fees.
- Fraud Protection (more on this later…).
- Extended Warranties.
Note: I am purposely not mentioning things like balance transfers and 0% intro APRs. For someone with current credit card debt, these could be very important perks, but they should not be something that matters to a new credit card user or someone with no debt.
Then, your premium credit cards will usually take it a step further, offering things such as:
- Concierge Service.
- Travel Insurance.
- Airport Lounge Access.
- TSA Pre-Check Credit.
- Free Checked Bags When Flying.
- And More…
Remember, these are not standard with all credit cards. Most cards offer some variety of them, so pay attention and see which perks your current or future cards have to offer!
4. Builds Good Credit History
This advantage can be a bit of a catch-22.
Credit cards are a great tool to help build good credit. Which can lead to countless benefits in its own right.
Although, you also need good credit in order to open a credit card in the first place. So, where should you start?
First, you can open a secured credit card that does not require a long credit history. Second, make your payments on time and in full every month. It will take some time, but if you stick with that plan you will have a strong credit history in a few years.
After that, you’ll be able to open better credits with more perks and more generous cash back and rewards offers!
View the Best Credit Cards:
5. Consumer Protection
Many credit cards actually offer great consumer protection.
I say “actually” because with all the focus on data security these days, I know many people are hesitant about putting any personal info online.
Despite that, using a card is still way safer than carrying around cash! Here are three of the biggest consumer protection advantages of credit cards.
Almost all credit cards offer basic protection against credit card fraud. If anyone steals your card (or card number) and makes a purchase, you will be reimbursed and not obligated to pay for the theft’s purchases.
On top of that, a lot of credit cards offer protection against companies mischarging you. While you might not be worried about Target or Walmart putting fraudulent charges on your card, it’s a nice benefit when buying from smaller, unknown vendors off Etsy or ebay.
Many cards offer car and travel insurance benefits.
Car insurance is usually for rentals, which will save you the extra fee they always try to charge before you pull out of the rental lot.
Travel insurance comes in a few different forms, but most commonly offers you protection against canceled flights, lost bags, and other trip disruptions. Make sure to read the terms and fine print carefully (I know, boring, but important) as they vary by card and by the credit card company.
Returns and Warranties
Credit cards want you to spend money without thinking twice. That’s because they get paid by vendors every time you make a purchase. The more you spend, the better it is for them.
So, to help ease your mind when making purchases, oftentimes credit cards provide return protection, purchase protection, and extra warranties. While this shouldn’t be the driving reason for you to make a purchase that doesn’t fit in your budget, it is a nice, free perk!
6. General Safety and Security
On the same vein as the last advantage, credit cards offer more safety and security than just carrying cash. This can be annoying and even dangerous if you are traveling and attracting unwanted attention by pulling out wads of cash.
Plus, if you lose your credit card or if it gets stolen, you can easily cancel it. If you carry cash and lose it, it’s gone forever.
7. Shop Easily Online
Can you imagine shopping online without a credit card?
I guess a debit card could work, but then you lose out on the biggest advantages of credit cards: cash back and rewards.
The bottom line is, credit cards make it easy to shop online and even secure reservations over the phone (like for hotels and rental cars) that might require “putting a card down.” Without them, it’s much more difficult, if not impossible.
8. Delay Your Payment
Time is money.
Ever wonder what that really means?
Well, in this case, it means not having to pay until the end of the month, saving you money.
You save because of a fun calculation called the future value of money. At least, it’s fun for me!
The future value of money calculation shows what $1 today would be worth in the future. Usually, your money today will be worth more if you can save or invest the money and get some sort of return (through interest, dividends, capital gains, etc.).
Here is the quick example to bring this point to life, with the assumptions being:
- Let’s say you spend $2,000 on monthly expenses.
- The stock market returns 6% annually.
Without a credit card, you would be forced to use cash or a debit card to cover the $2,000 of expenses throughout the month. You would not be able to invest your money and get the stock market returns (second bullet above) because you need to keep it on hand in a checking account to cover expenses as they come up.
With a credit card, you could invest your $2,000 on the first of the month instead of using it to cover your expenses in-month like in the first scenario. With the 6% annual return from the stock market, it would grow to be worth $2,010 at the end of the month when you go to withdraw it!
By using a credit card and deferring payment to the end of the month, you can invest your $2,000 at the beginning of the month. The stock market then goes to work and creates more money for you over time. Time really is money!
9. Easier to Budget
Credit cards work very well for budgeting because they track your spending for you (sometimes even by category), which makes it easy to set and track a budget.
This is especially useful when combined with a budgeting app or platform like PocketSmith or Mint.
Last but not least on the list of credit card pros, they are convenient and make life easier.
They let you easily spend money online and in stores, with almost every merchant and seller willing to accept credit cards these days. You don’t have to carry around cash, or even worse, coins (gasp!).
It’s also never been easier to pay for credit cards, as you can usually quickly and easily transfer money directly from your bank account in a matter of minutes.
I can’t say it enough – credit cards are a great tool for consumers.
Ready to open up your next personal credit card? View, compare, and apply for the best credit cards out there.
Disadvantages of Credit Cards
Credit cards have many advantages, but it’s not a one-sided story. Of course, there are also some cons of credit cards.
Mainly, they are things that you can avoid. But, of course, in order to avoid them, you must be aware of them.
So here they are:
1. Potential to Overspend
Credit cards are convenient and easy to use, as I mentioned. Unfortunately, they can sometimes be too convenient, which can lead to people spending outside of their budget.
In order to take advantage of the advantages of credit cards, you must use them responsibly! This involves managing your credit card use and spending within your means.
2. Interest Rates
If the first big downfall to credit cards is overspending, the second is not paying your monthly bill on time.
When you don’t pay off your credit card balance every month, it can start to accrue interest. As mentioned earlier, the interest could be as high as 15%! This is how the credit card companies make big money off of consumers.
Going back to the horror stories I mentioned in the intro, this is how they happen. These high-interest rates can cause your credit card debt to balloon, fast.
Naturally, it’s best to avoid credit card interest altogether. To do that, you need to pay your credit cards back on time and in full every month (I told you you’d hear this again!).
3. Hard Credit Checks
A hard credit check occurs whenever you open a new credit card. Essentially, this is the bank or institution placing a request to view your credit to ensure you are a trustworthy consumer before issuing you a card.
The downfall is that hard credit checks can have a short term negative effect on your credit score.
So, you should only open a couple of credit cards a year at most. Also, you should avoid opening cards prior to needing to use your credit for a large purchase (like a house or car).
Don’t worry too much, this short term negative effect fades over time (usually in a couple of months) if you use your card responsibly after you open it.
Pro Tip: Even if you open a business credit card, it will likely still result in a hard credit check on your personal credit score.
4. Hidden Fees
Like any financial service, you should be aware of hidden fees and avoid them at all costs!
With credit cards, foreign transaction fees are often the most surprising. There is nothing worse than going abroad only to find that you spent an extra 3% on every purchase.
But you should also be aware of late payment fees, annual fees, and any other cost of owning the card.
View the Best Credit Cards:
5. Lasting Credit Damage
Using a credit card is a great way to build credit, but it can also destroy your credit if used irresponsibly!
Like a reputation, a credit score takes a lot of time to build up, but only a few bad decisions to muddy.
So be sure to use your card responsibly, and to make your payments on time and in full every month and never carry a balance on your credit card bill!
^alright, that’s the last time.
Summary: Advantages and Disadvantages of Credit Cards
The advantages of credit cards clearly outweigh the disadvantages. The cash back and rewards alone give you a meaningful discount on everyday shopping, not to mention the countless other perks that are associated with using a credit card responsibly.
So, if you’re ready to open a credit card and take advantage of these benefits, here are some resources:
Credit Card Tool:
Use our credit card tool to find the best card for you based on your spending habits!
View and Apply for the Best Credit Cards:
Get a list of the best credit cards here. You can compare cards and apply directly for the ones that are the right fit for you.
Editorial Disclaimer: Opinions expressed here are the author’s alone, not those of any bank, credit card issuer, airlines or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.