Credit cards are a convenient tool that can offer many benefitsÌýbut can also be damaging if not used responsibly. Learn more about credit cards and the pros and cons of using them.
How credit cards work
There is one big difference between credit cards and debit cards—credit cards are a type of loan that allows you to ‘borrow’ when making purchases, where debit cards are connected to your bank account and use the funds you already have.
Credit cards come with an interest rate—a percentage of your balance that is charged if your balance is not paid in full each month. Your credit score typically determines your interest rate with a credit card.
Credit scores indicate how responsible of a borrower someone is,Ìýand are important when you need to borrow for a car or home. Five things determine your credit score: payment history, outstanding debt balances, length of credit history, types of credit and recent credit report inquiries.
Each month at the end of your credit card billing cycle, you receive a statement with your outstanding balance of purchases made and transaction history. The statement also has a minimum payment you need to pay by your due date. If you pay only the minimum payment of your total balance, you will see an interest charge on your next statement from the part of your balance you did not pay. If you pay off that month’s total balance, you will not be charged interest.
Pros of using a credit card
- Build credit: One of the easiest ways to start building your credit score is by using a credit card. By responsibly using a credit card, you can begin establishing a payment history and other factors that go into your credit score.
- Avoid fraud: Unfortunately, fraudulent charges can happen to anyone. Some credit cards allow you to ‘turn off’ your card from a mobile app when you aren’t using it, helping to protect you from fraudulent charges happening. If you notice a fraudulent charge on your transaction history, disputing that charge on a credit card can often be more quickly resolved than a charge on a debit card.
- Earn rewards: Many credit cards have a rewards program that allows you to earn cash back, airline miles or points to redeem for merchandise and gift cards.
Cons of using a credit card
- Temptation to overspend: Credit cards can make it easier to make impulse purchases and spend money you don’t have. This habit can lead to credit card debt, the risk of late payments and potentially a lower credit score.
- Interest charges: If you are only able to make the minimum payment each month, interest is charged on your remaining balance. Interest charges can add up, increasing the overall balance you eventually need to pay back.
- Consequences with late payments: Not only will you be charged a late fee that will increase your balance, but late payments will also negatively affect your credit score.
Tips for using credit cards responsibly
- Research different credit cards to find the lowest interest rate and best rewards program for you. Your local bank or credit union can be a great place to start looking.
- Consider your card limit. If you feel like you might be tempted to overspend, ask for a lower limit based on your monthly budget.
- Don't spend more on your credit card than you have in your bank.ÌýYou also don’t have to wait until the end of your billing cycle to make payments; paying off your balance every week or two can help keep track of your spending and avoid interest charges.
- Pay your bill each month by your due date.
- Regularly review your transaction history for fraudulent charges.
For all things financial-related, from budgeting and saving to taxes and debt, ¶¶ÒõÂÃÐÐÉä Money Sense is here to help you learn and understand your personal finances.
