Credit cards are one of the most widely accepted forms of currency globally, and they’re found in nearly every household wallet in America. Studies on credit card use show that most adults in the US have at least one or two credit cards, and some have three or more. Given these numbers, it’s not surprising that the country’s total household debt is nearly $18 trillion.
However, much of that debt is delinquent. Credit cards can be helpful, but they can also add stress to income-tight households.
Done wisely, your credit card could become a path to free and reduced expenses, but if you aren’t careful, it can be a slippery slope to long-term debt. If you’ve wondered whether the perks offered by your credit card company are worth the interest accrued on everyday expenses, consider these pros and cons of credit card use.
1. Why Using Credit Cards Can Be a Pro
If you have decent credit, most card companies want you to use their credit cards. The interest they gain from your purchases, plus the fees they receive from the retailers you use, more than pay for the perks they offer. But if you don’t take advantage of those benefits, or you weren’t going to make the purchase anyway, it isn’t worth using the card.
With those two factors in mind, let’s look at why you should use your credit card during your everyday shopping. Before you pay for gas, groceries, or utility expenses, consider whether a credit card might be the best form of payment.
It’s a Credit Builder
If you’re just starting out in the world of adulting or rebuilding your credit, using a credit card regularly and paying it off each month is one of the best ways to show you’re responsible with money. The key is to pay the balance, or as much of it as possible, before the due date to avoid accruing interest. The repayments appear as “paid on time” on your credit report, establishing a good credit history.
Paying before the billing cycle ends also reduces how much of a balance the card issuers report to the credit bureaus. The higher your balance, the higher your credit utilization ratio, which can decrease your credit score — the opposite of your financial goal.
You’re Rewarded For Spending Money
Imagine paying for your groceries and gas and receiving a free night at your favorite hotel or tickets to a theme park. That’s the kind of thing that happens when you strategically use your credit card for everyday purchases. Since you would spend the money anyway, you might as well be rewarded for it.
Review the terms of your credit card agreement. Check the website and look at the rewards you’re entitled to when you use your card. These perks are provided as points or cash back on spending. Instead of using your debit card, pay for your expenses with a credit card, and then use the money in your checking account to pay off the balance at the end of the month. You’ll accrue points, but not interest.
Pay attention to the categories that provide higher rewards. For many credit card companies, spending money at restaurants or traveling gives you more points or cash back. This knowledge comes in handy if you have more than one credit card and aren’t sure which one to use for which purchases.
Credit Cards Protect Your Spending
With fraud and identity theft so common, having a backup of security protection is always helpful. Credit cards have security features that keep you safe from fraudulent charges if your account was used without your knowledge or permission.
2. The Downsides of Credit Card Use
You know yourself and your money habits best. Using credit cards wisely takes discipline; otherwise, you can end up in substantial debt with interest rates that are difficult to pay off. Financial experts suggest eliminating all interest-bearing debt as the first step to a strong retirement portfolio, as discussed in this article by OJM Group.
That’s not to say that credit cards are always a “no” if you want to be successful with your money. But you need to be aware of the downsides of credit card use to avoid falling into the trap of too much debt, such as:
- Missing a due date. Late fees can be more than your minimum payment. One day late can add interest and fees that are difficult to come back from and show up as late payments on your credit report.
- Accruing debt and increasing your credit utilization. Low credit utilization rates improve your credit score. The sweet spot is a rating under 30%. The higher your balances, the more of a credit risk lenders consider you.
- Spending unnecessarily. It’s easy to see a big credit line and be tempted to use it frivolously. But this type of spending can be challenging to pay off monthly without impacting your budget. Be sure that you can pay off whatever expenses you put on the card.
Recognizing the dangers of credit cards and knowing your spending habits will help you decide whether using them for everyday expenses is wise for your financial goals.
Conclusion
If you use credit cards to pay for your purchases, the next step is to find the card with benefits you’ll use. Look for cards that reward the categories you buy the most, from groceries and gas to traveling and dining out, and enjoy the perks of paying for your daily expenses!
