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Pros and Cons of Credit Cards

Kiara Taylor

Jun 20, 2022 8 min read

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Pros and Cons of Credit Cards

Let’s take a look at some of the pros and cons of having a credit card. We will cover the benefits like rewards, credit-building and fraud protection, as well as some of the cons like interest fees and the potential for credit score damage.

What Are the Pros of Having a Credit Card?

There are multiple benefits that come from owning a credit card, including the opportunity to build credit, earn rewards, be protected against card fraud, and much more.

Monthly Payments

Let’s look at the main advantages of credit cards in detail:

Credit Building

Credit Report

Building a credit score is one of the most important aspects of having a credit card. Equifax and other credit bureaus will base your credit score on the following calculation:

  • Payment history 35%

  • Credit utilization 30%

  • Credit history 15%

  • Credit mix 10%

  • Credit inquiries 10%

This information shows lenders how trustworthy you are with credit and how likely you are to be able to pay back debt. By having a good credit score, you will be able to buy items of higher value with lower interest rates and get cheaper loans and cash advances.

Credit cards help by building credit as they help you establish a credit history and a good payment history (as long as you’re making all your payments on time, that is).

Convenience

Credit Card Account

Credit cards offer access to funds you may not yet have, and allow for opportunities you may not get from your bank account. As long as you know your credit card number, CVV, and expiration date, you can pretty much have access to funds anywhere. 

Credit cards also have the convenience factor of their physical size and durability. And what if your card gets stolen or you lose it? No worries - most of the time, you can call the card provider to get your card frozen and, with many card issuers, you can even do this at the touch of a button through your banking app. 

Rewards

Rewards Cards

Besides the standard benefits of having a card, many companies will offer cards with generous rewards and incentives to get you to use them. The main three “bonus rewards” that are offered are:

  • Cash-back

  • Miles

  • In-store discounts

Miles are awarded to individuals (and businesses) who sign-up and use a specific card frequently. In exchange, credit card companies award those users with miles that can be used for flights across the globe. 

Cash-back is what the name implies, a percent of money back for your credit card purchases. Cash-back can be a fantastic benefit if you do it right. You can earn 1%-4% on your purchases if you pay your cards off in full and on time! If not, you will lose that benefit to interest. 

Lastly are in-store discounts. If you go shopping at a specific location, this reward will help you save money on your purchases there. 

It’s a good idea to do some research to work out which rewards would be of most benefit to you, based on your lifestyle and spending habits.

Theft Protection

Credit Card Fraud

One awesome thing about credit cards is that they have a lot of features to deter theft. If you lose your card, you can get on a phone, computer or app and freeze the card. 

Bought something from a fraudulent company? Most credit card companies will initiate a chargeback with the fraudster, giving your money back quickly and fighting the company on your behalf. Visa, Mastercard, and American Express also offer $0 purchase protection as a benefit of being their customer.  

Online Shopping

Credit Line

Another credit card benefit is the ability to buy things online. Credit cards offer easy access to many online stores and allow you to buy items securely. Online shopping is tied to other credit card pros, such as earning rewards, protection from online fraud, and the ability to dispute transactions.

Grace Period

Late Payments

At the end of each billing period, you are typically given a 21-25 day grace period to pay off your account balance. If you bought something large at the beginning of your current billing cycle, this gives you about 50 days before you owe on your purchase interest-free.

Cheap Currency Conversion

For those looking to take advantage of those miles you have accrued and travel to a far-off country, there is another generous reward you can take advantage of! Most credit cards will offer 1% conversion fees (or no fees at all!) on foreign currency as a benefit to their customers.

Travel Insurance

Foreign Transactions

Some credit card companies offer their clients travel insurance as an extra perk. This travel insurance works the same way as regular travel insurance, except it’s subject to the terms and conditions of the issuing company.

Your credit card may offer travel medical, covering health-related expenses, or trip protection insurance, covering trip cancellations, lost or stolen luggage, etc., or a combination of the two. 

Chargebacks

Additional protection from credit cards also comes in the form of a chargeback. The chargeback should be a last resort tool only used in emergencies, such as canceling a plane ticket because you got COVID or if you scheduled a hotel room from a company going out of business. Debit cards also offer chargebacks, but unlike the instant return of funds from credit cards, debit cards can take up to two weeks. 

However, chargebacks can be detrimental to the company you are charging back from. These companies will get hit with fees and account suspensions and may even have their merchant account terminated. So don’t take this power lightly!

What Are the Cons of Having a Credit Card?

Pros and Cons of Credit Cards

Now that we have covered all the benefits of credit cards, let’s discuss the drawbacks. There are five major disadvantages of credit cards:

  • Interest rates and fees

  • Debt

  • Potential fraud

  • Credit score damage

  • Overspending

Having a credit card and maximizing its benefits takes thinking, budgeting, and paying your debt on time and in full. If you miss a payment, you will start accruing high interest and damaging your credit score, which will reduce your ability to get a mortgage or a car loan. Make sure you use your card appropriately and seek guidance on spending and building credit when necessary. Banks and credit unions typically offer educational classes on how to use a credit card correctly and build your score efficiently.  

Let’s take a closer look at the drawbacks of having a credit card and why appropriate use is so crucial:

Interest Rates and Fees

High Interest Rates

First, it is important to know that “APR” is different from “interest rate;” APR includes fees on top of interest rates. When you sign-up for a credit card, you are locked into an interest rate determined by your credit score. 

If you pay off your account balance in full by the due date, you will not be charged for the interest. We will use an example to help you understand how much you could be charged. 

Let’s say you have a credit card with a 21% APR and a balance of $1,400 on your card. To figure out how much you owe in interest, take your rate in decimal form (.21) and divide by days in the year 365: 

.21/365= .000575

This gives you the daily periodic rate. Multiply the daily periodic rate times your current balance:

.000575 x $1,400 = .805  

Multiply .805 x 30 (30 days a month) = $24.15 

Debt

Accumulating Debt

If you don’t pay off your balance in full by the payment due date, you will accrue interest on your balance. This can quickly start to mount up, especially if you’re only making the minimum payment each month. 

In order to avoid this, it’s best to treat your credit card as if it’s a debit card; only making purchases that you have the funds to pay off.

Potential Fraud

Although credit cards have fraud protection, they are susceptible to various attacks that can result in a loss of funds. Attacks on your credit card include physical and digital fraud. 

Physical attacks come in the form of stencilling your card when you give it to someone, allowing them to collect your card number, CVV, and expiration date. It can also happen by tap-to-pay readers touching your wallet and charging you for a product you didn’t buy. 

Digital attacks usually happen similarly but are sent as phishing emails that include links and pages for reputable companies like Amazon. They will have you “buy” a product just to get your card info and buy things using it.

Potential Credit Score Damage

Credit Scores

Just as a credit score can help boost your credit score if you use it responsibly, it can also damage your score significantly if you’re not maintaining good financial habits.

Even one missed payment can have a considerable impact on your credit score, as will carrying a balance above 30% of your credit limit. For this reason, it’s vital that you make all your payments on time and keep your balance low, even if that means making payments more often than once a month.

Financial Institution

Overspending

When using a credit card, we don’t feel our expenditure in the same way we do when we’re physically handing over cash. For this reason, it can be a lot easier to overspend with a credit card.

A good way to reduce overspending is to set daily max-out values on your card through your bank app or with your card issuer. It’s also a great idea to set a budget and track your spending to make sure you don’t go over it.

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The Bottom Line

There are lots of pros and cons to having a credit card. If you get a credit card, use it only when you know you can pay it off in full and on time. By doing this, you will maximize your bonus rewards, get additional protection, grow your credit score, and enjoy the convenience they offer.  

Kiara Taylor
Kiara Taylor

Kiara Taylor is a financial analyst and writer with over 10 years of experience in the finance industry. She has contributed to publications such as Investopedia, The Balance, Crunchbase, and Harvard Business Review. Kiara is fascinated by fintech’s capacity to increase accessibility to financial products and services, and she is an active proponent of increased diversity in the finance space.

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