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Let’s get this out of the way: Credit cards aren’t inherently bad. They’re simply financial products that allow you to make purchases without having the cash on hand right away.
Still, according to a NerdWallet survey, nearly one in 10 Americans (9%) think credit cards are evil. After all, they charge high interest rates and allow you to keep spending even when you’re already in debt, which can lock you in a seemingly endless cycle of owing money. And while credit cards themselves are not bad, credit card debt certainly can be.
The benefits of credit cards
Easy, convenient purchases
Carrying a credit card means you always have a payment method on hand, without having to locate an ATM. And if you’re making a major, expensive purchase, your credit card essentially fronts the cost for a few weeks.
True, debit cards have a convenience factor too, but they don't help you build credit, they typically don't earn rewards and they may leave you more exposed if you become a victim of fraud.
The ability to build credit history
Applying for a credit card takes minutes, and using the card responsibly (see tips on how to do that below) can help you establish or rebuild your credit history. Good or excellent credit, corresponding to FICO scores of 690 to 850, can make you more likely to qualify for a wider variety of credit cards, especially those offering premium perks.
But good credit also unlocks a lot of other doors. It can help you qualify for lower interest rates on mortgages and other loans, saving you money. Landlords and utility companies also consider credit scores when reviewing your application for a rental home, or determining whether you can get access to utilities without having to put down a deposit.
Valuable perks and rewards
Cash-back and travel rewards credit cards can make every purchase more valuable. These rewards cards earn points and miles that you can redeem for cash (usually in the form of a statement credit or direct deposit to a bank account) or discounted travel. Some cards offer additional benefits, like a statement credit covering the cost of TSA Precheck or Global Entry, free checked bags when you fly, hotel room upgrades, airport lounge access, discounts at select merchants and more.
All told, the value of these extras can add up to hundreds of dollars.
Protection for purchases and travel bookings
Some cards will reimburse you if a purchase gets lost during shipping, arrives broken or if the merchant won’t accept a return. They may also add an extra year to the manufacturer’s warranty. And some travel cards offer trip cancellation and delay coverage, reimbursement for lost baggage, rental car insurance, roadside assistance and more.
Keep in mind that to get these protections, you must use the card to make the purchase. Simply carrying the card and using a different one at checkout won’t provide coverage.
Quick reimbursement for fraudulent charges
If you notice something fishy on your statement and report it to your credit card company, you’ll get your money back quickly. By law, you’re not liable for more than $50 when someone makes a fraudulent charge on your card, but many cards go further than that and offer $0 liability.
With debit cards, you can get your money back for suspicious charges, but the longer it takes for you to notice and report a theft, the more liable you may be for the stolen funds. Plus, fraudulent charges on a debit card mean the cash is withdrawn directly from your bank account.
» MORE: How to prevent credit card fraud
The drawbacks of credit cards
High interest rates
According to the Federal Reserve, the average annual percentage rate for credit cards that incurred interest was 16.43% in the third quarter of 2020. Put another way, if your credit card charges that interest rate on a $10,000 debt and you make $150 monthly payments toward that debt, you’ll spend $16,906 in interest on top of the $10,000 you owe. (See our credit card payoff calculator here.)
But if you don't carry a balance — that is, if you pay your bill in full and on time every month — then a card's APR is irrelevant. You won't incur a dime of interest.
The ability to add onto existing debt
Most credit cards offer a revolving line of credit. That means that during each billing cycle, you can charge up to your credit limit, but you only have to pay back a small portion of that total. Once you do, you’re free to spend up to your credit limit again, while the remaining balance from the previous billing cycle accrues interest. Do that a few months in a row, and your credit card debt will grow quickly.
This feature does grant you flexibility when you’re in a financial bind. There may be months where all you can afford is the minimum payment, and still having access to your full credit limit can be a lifeline when you’re experiencing hardships. But it also makes it easy to get deeper and deeper into high-interest debt.
Potentially confusing terms and conditions
Rewards may expire after a few years, or not. If you miss a payment, you may be subject to a higher penalty APR for an undefined period of time. If you redeem points for travel, they may be worth 1 cent each, but if you redeem for a gift card, maybe they're worth only 0.5 to 0.75 cent apiece, depending on the merchant and, seemingly, the phases of the moon.
It can be tough to memorize the terms and conditions of the cards you carry (and the more cards you carry, the more complicated this can get).
You can access the fine print for credit cards, whether you already have the card or not, on the card’s website. Yes, this can feel like homework, but it’ll help you truly understand how your card works, and sometimes, a valuable perk that isn’t otherwise advertised is hidden in that fine print.
How to use credit cards responsibly
Pay every credit card bill on time (and ideally in full, too)
If you miss a credit card payment, you may be subject to a late fee and a serious ding to your credit scores. Making on-time payments of at least the minimum amount due will keep your account in good standing, which helps build a positive credit history over time.
If you can afford to pay every credit card bill in full, you’ll avoid carrying a balance and paying interest.
Try not to use too much of your credit limit
Your credit utilization, or the percentage of your total credit limit that you charge each billing cycle, has an impact on your credit scores. We recommend you charge no more than 30% of your credit limit each month.
Keep credit card accounts open for a long time
You may not want to hold onto a card you never use, especially if it charges an annual fee, but an older average age of credit card accounts is good for your credit scores. Check with your card issuer to see whether downgrading to a no-fee version of the card is possible so you can cut out the annual expense while preserving your account history.
Then, put a small recurring charge on that card to keep the account active, like a streaming service subscription, and set up autopay so the bill is paid in full each month. Otherwise, if you don’t use a card for a long time, the issuer may close it, which can also affect your credit scores.