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Credit cards are tools. Like most tools, they can be incredibly helpful when used properly but dangerous when used incorrectly.
Putting purchases on credit cards rather than using cash comes with a raft of benefits, from earning rewards to gaining valuable consumer protections. The most common pitfalls of credit card use — overspending and interest charges — can be avoided with responsible use, but they're still worth being careful of.
Here are some of the biggest pros and cons of shopping with a credit card.
Convenience. Credit cards give you purchasing power worldwide — locally and overseas, in stores, online and by phone. Many credit cards (especially Visa and Mastercard cards) are accepted virtually anywhere. You don't need to carry wads of cash.
Rewards. Rewards credit cards give you cash back, points or miles for each dollar you spend. Many of them offer bonus rewards in specific categories, such as supermarkets, gas stations and restaurants. If you like to travel, you can earn your way to a free trip via airline miles, hotel points or general-purpose rewards you can use for any travel expense. Of course, you don't want to spend money just to earn rewards. But rewards cards are ideal for getting something back on purchases you were going to make anyway.
Financing large purchases. Credit cards let you buy something now and pay for it over time. We'll discuss the dangers of this later, but don't overlook the advantages of using credit. Say you're facing a big car repair, or your washer breaks down and you need a replacement — but you don't have the money to pay for it all at once. Putting the bill on a credit card allows you to make those urgent purchases now and pay for them over time (albeit with interest).
Building credit. Credit cards can be invaluable for strengthening your credit. By making frequent purchases and keeping current with your payments, you can build a positive credit history, which will be reflected in your credit scores. Those scores affect your ability to get loans, rent an apartment and, in some cases, even get a job.
Emergency purchasing power. Ideally, you should have an emergency fund with enough money to cover three to six months' worth of expenses to keep you afloat in case of a layoff, medical emergency or other unexpected event. That's not always possible. A credit card can help you juggle unforeseen expenses. To give yourself flexibility in emergencies, though, keep your balances low at other times.
Protection. Credit cards have better protections against fraud than debit and ATM cards. With a credit card, you'll pay no more than $50 in the event of fraudulent transactions — and many issuers pledge that you'll have no liability whatsoever. With a debit card, you could end up paying the full amount if you wait too long to notice or report losing a card. Moreover, many credit cards offer valuable insurance, too — from cell phone protection to travel coverages and more.
Interest charges. Perhaps the most obvious drawback of using a credit card is paying interest. Credit cards tend to charge high interest rates, which can drag you deeper and deeper in debt if you're not careful. The good news: Interest isn't inevitable. If you pay your balance in full every month, you won't pay interest at all. And if your credit is good enough, you may qualify for a card with an introductory 0% APR period, which allows you to finance a large purchase over time without interest.
Temptation to overspend. Credit cards make it easy to spend money — maybe too easy for some people. When you're not laying out cash upfront, you can get detached from your spending. If you're not careful, it's easy to fall into suffocating debt. It all comes down to being careful with your money.
Late fees. Fail to pay your bill by the due date, and you'll probably get hit with a late fee, which can approach $40. This adds up quick for repeat offenders.
Potential for credit damage. Credit scores essentially measure how much you can be trusted with borrowed money. That's why using a credit card wisely will build your credit. It's also why using cards irresponsibly can damage your credit. things like high balances, late payments and frequent applications for new cards can knock points off your score.