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When used correctly, the advantages of credit cards are plentiful. Not only do they build credit and earn rewards; they’re also more convenient and secure than other options. But new credit card users need to follow certain rules so they don’t end up in debt.
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So your buddy’s a credit card fanatic who keeps telling you about all the rewards he’s earning. I just got a free flight to Aruba, man!
While Aruba sounds pretty nice, a little voice in the back of your head (maybe it sounds a lot like your mom) keeps saying: Watch out, credit cards are dangerous!
So what’s the deal? Are credit cards the greatest thing since sliced bread? Or a slippery slope into debt?
The truth is somewhere in between: When used incorrectly, credit cards can lead to a dangerous pit of high-interest debt. But, when used correctly, they are an amazing tool.
Here are the seven biggest advantages of credit cards, along with the rules that will allow you to use them without fear.
The cardinal rule of credit cards: Only charge what you can afford, and always pay your statement balance in full and on time. By doing that, you’ll be able to enjoy all of the advantages of credit cards — with few of the cost, if any.
First, let’s briefly review what makes credit cards different from debit cards. While they may look alike — and may offer the same convenience in the checkout line — they’re actually quite different.
Debit cards are linked to your checking account. Whenever you swipe a debit card, you’re spending your own money.
Credit cards, on the other hand, are a “revolving line of credit” from a bank. Whenever you swipe a credit card, you’re spending the bank’s money, which you’ll need to pay back when you get the monthly bill.
With a debit card, the maximum amount you can spend is whatever’s in your checking account; with a credit card, the maximum amount you can spend (before paying down your balance) is your “credit limit.”Read more How Does a Credit Card Work? Here’s an Easy-to-Understand Guide and Credit Card Definition
Now here are seven advantages of credit cards you should know about.
The No. 1 advantage of credit cards? Unlike debit cards or cash, they can help you build your credit.
When you pay your credit card bill, the issuer typically reports your payment to the three major credit bureaus (Experian, TransUnion, and Equifax). With each on-time payment, you can build your credit scores.
Having a credit card aids your credit in other ways, too: If you keep it open for a long time, it increases your length of credit history, and if you keep your balance low, it improves your credit utilization ratio.
This chart shows the criteria used to create FICO scores and their relative importance in your credit score.
Overall, having good credit removes several of life’s headaches: You’ll find it easier to get approved for apartments, loans, and some jobs, and will get lower interest rates on everything from auto loans to mortgages.
RULE: To improve your credit scores, always pay your credit card bill on time. Only charge what you can afford to pay off each month, so you can keep your credit utilization ratio low. And think twice before closing a credit card, even if you don’t use it anymore.
If you have bad credit, you can apply for a secured credit card. These require a deposit that, in most cases, then serves as your credit line. Since secured cards report your behavior to the credit bureaus, they’re a smart way to repair your credit until you can get approved for an “unsecured” (read: regular) credit card.
In addition to building credit, the other main reason to get a credit card is to earn rewards, either in the form of cash back or travel. Many cards earn rewards with every dollar you spend, and also come with a signup bonus when you spend a certain amount on purchases after opening the card.
Most rewards credit cards earn at least 1% cash back on every purchase. So, if you spend $1,000/month on your card, you’ll earn $10/month in cash back. At the end of the year, that would add up to $120 — just for spending money like you normally would.
You can also look into travel rewards cards, which earn points or frequent flyer miles that you can redeem for free flights and hotel stays.
Last year, for example, my partner and I traveled around the world thanks to credit card rewards. We applied for cards like the Chase Sapphire Preferred® Card (Review) and Chase Sapphire Reserve® (Review), racking up 200,000+ points over several years — and then redeemed them for thousands of dollars of flights to places like Argentina, Italy, and India. Without points, it would’ve been much tougher to afford the trip!
RULE: Never go over your budget to earn rewards. Since rewards cards typically have high interest rates, you should only apply for one if you know you’ll pay off its statement balance in full each month. Otherwise, the interest will negate any points you earn!
On credit cards, interest (also called “APR“) is high: usually between 15% and 20%. If you only make the minimum payment each month, you’ll accrue more and more interest — which can quickly become overwhelming.
Here’s a secret, though: You don’t have to pay interest, ever.
Nearly all reputable credit card issuers offer an interest-free “grace period” between when you make a purchase and when your bill is due. If you make a purchase near the start of your billing cycle, that could equate to an interest-free loan lasting nearly two months!
Read more about avoiding interest on credit cards.
RULE: Make big purchases near the beginning of your billing cycle to lengthen the term of your “interest-free loan,” then pay your statement balance in full when your bill arrives.
Need to float a large purchase over the course of 12–18 months? That’s another advantage of credit cards. If you have good credit, you can apply for a 0% intro APR credit card and pay off the balance before the promotional period ends.
Another huge advantage of credit cards is the fact they’re more secure than cash and debit cards.
If you’re carrying around $200 and a pickpocket snags your wallet, you’re out of luck. But if your credit card gets lost or stolen, you can simply call your issuer and cancel the card.
Even if the thief has already managed to charge some purchases to your card, all major issuers offer a $0 liability guarantee. So, as long as you report the card lost or stolen, you won’t be on the hook for any fraudulent charges.
While debit cards offer fraud protection, too, it’s not as robust. Your liability will depend on when you report the fraud — and it may take a while until the money is returned to your bank account (potentially causing a cascade of missed bills and overdrafts).
Because of their $0 liability, credit cards are the safest bet for online shopping, too. If you want additional security, you can even ask your issuer for a virtual credit card that masks your true account number.
Lastly, credit cards offer you the ability to request a “chargeback” when you don’t receive what you paid for.
When I ordered a Japan Rail Pass online, for instance, the company sent it to the wrong address — and I didn’t get it in time. But the company refused to refund me the exorbitant shipping costs, despite many phone calls and emails. Luckily, I’d bought the Rail Pass on my Chase Sapphire Reserve®. I called Chase; it refunded my money, and I never had to deal with the shady company again.
RULE: Monitor your credit card account carefully. Although credit card issuers offer $0 liability, you need to spot the fraud in order to claim it. Check your statements for suspicious activity at least once a month, and check your credit reports at least once a year.Read more Credit Card Chargebacks – How to Get Your Money Back
Whenever I carry cash, it just disappears — and I never have any inkling where it went. I imagine I’m not alone in that experience.
But now that I put most of my purchases on a credit card, I can easily track my spending each month. My credit cards are linked to Mint so I get a clear breakdown of the amount spent in each category.
Overall, using credit cards has given me a fairly holistic picture of where I’m spending my money (and, fine, where I can cut back).
RULE: Use your credit cards as a tool for easier budgeting — not as a tool for easier shopping. If you have trouble controlling your spending, try a zero-based budgeting app like YNAB or EveryDollar before getting a credit card. Then, once you’re in the habit of only spending what you can afford, consider starting with a secured card so your credit limit remains low (you can also ask issuers to lower your credit limit if you’re worried about overspending).
Although it depends greatly on which one you choose, many credit cards come with additional perks.
Over the years, for example, I’ve used travel insurance to pay for meals when my flight got delayed, car rental insurance to cover the costs of a fender-bender in Iceland, and Chase Offers to earn extra discounts on my online purchases.
Here are some credit card perks you might encounter:
RULE: When you get a credit card, read through its benefits guide carefully. Make sure you’re taking advantage of every perk you can!
If you plan to travel, either in the U.S. or abroad, you’re probably going to want a credit card.
Not only can they earn rewards that lower the cost of traveling, but they’re also much more convenient when you want to book a hotel room or a rental car.
(When you use a debit card, hotels and rental car agencies will put a “hold” on your card, sometimes to the tune of several hundred dollars, preventing you from spending that amount until you check out.)
When traveling abroad, credit cards also offer a better currency conversion rate than you’d get from exchanging cash. Plus, for the reasons cited under header No. 4, they are more secure.
RULE: Before you head out, put a travel notice on your credit cards so they don’t get flagged for suspicious activity. And, if you’re going overseas, make sure you’re packing a card without foreign transaction fees.
If you can follow the rules above and practice responsible credit card use, credit cards can be a powerful (and convenient!) financial tool. You’ll be able to build your credit history and get rewarded for your everyday spending.
BUT, if you think you’ll be tempted to overspend, potentially ending up with a heap of credit card debt, the advantages of credit cards aren’t worth the costs.
Take some time to think about your spending habits — and if you decide to get a credit card, start slow. The rewards will be waiting when you’re ready.
11 Best First Credit Cards (And All the Credit Questions You Were Afraid to Ask)Here's how to get started
Susan is a freelance writer who specializes in turning complex financial topics into engaging and accessible articles. She's been writing about personal finance for six years, and was previously the senior writer at The Penny Hoarder and a staff writer at Student Loan Hero. Her personal finance writing has also appeared in publications like MarketWatch and Lifehacker.
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