Skip to Main Content

Financial Advice

Understand Your Credit

TOPICS

The Benefits and Challenges of Credit Cards

credit card

Like most things in life, there are pros and cons to having a credit card. Some people encourage the use of credit cards while others shun it completely. The choice is personal. To help you make the right choice for you, we’ve outlined some reasons why credit cards can be beneficial for your long-term financial life (specifically by improving your credit score) as well as tips for avoiding some of the problems commonly associated with credit cards.

Benefit #1. Credit Cards Help You Build Credit History
Having a good credit history can mean saving thousands of dollars on interest if you ever take out a loan for a large purchase or investment. One way to build a good credit history is to obtain and use a credit card responsibly. Using a card responsibly means paying your bill on time, spending wisely (not going over your limit), and managing your balance. Because your payment history can make up 35% of your credit score, it really is crucial that you pay your credit card bill on time, every time, with no exceptions. This demonstrates to future lenders that you can be responsible. When you use your card responsibly, maintaining a low balance and good record of payment, you can maximize your credit score. Consider keeping your revolving balance below 20-30% of your credit limit to make a good impact on your credit score.

Benefit #2. Credit Cards Can Promote Security
Most credit cards offer 100% liability protection on any fraudulent activity so you can feel secure. And many  credit cards come with built-in fraud protection to ensure you are alerted if there is unusual activity on your account. There are also additional layers of insurance, like rental car insurance or travelers insurance,  automatically built in to your credit card benefits. Contact your lender or financial institution  to find out what kind benefits come with your credit cards.

Benefit #3. Many Credit Cards Offer Rewards
Using a credit card for common purchases is a great way to rack up credit card rewards. Credit card rewards vary greatly. For example, you can earn airline miles or get cash back with certain purchases, and many other benefits. There are whole legions of people who actively pursue credit card rewards in order to exchange them for free flights or cash. The trick is to do your research and make sure the card you select fits your needs and lifestyle. If you use a credit card responsibly, you could potentially travel the world with the benefits your card(s) give you.

Challenge #1. Credit Cards Demand Responsibility
Although this might seem like common sense, if you’ve never used a credit card before, it can take some time to become accustomed to the responsibility it requires. This means sticking to a budget and working to pay more than the minimum payment each month. Credit card debt often comes with high interest rates, so it’s important to keep track of your spending. You might not be ready for a credit card yet. And if you’re not, that’s ok. Give it some serious, honest thought before making your decision.  

Challenge #2. Credit Cards Are Not a Good Alternative to Savings
Sometimes people who want to purchase a big ticket item like a large TV, a honeymoon, or even college tuition get a credit card to help them make that purchase when it may have been better to save up their cash ahead of time. Keep in mind that sometimes the fees and interest on credit cards make these big ticket items more expensive than they would have been if you saved ahead and paid cash.

Challenge #3. Credit Cards Can Lead to Spending More
Some people only realize the value of money spent when dollar bills actually physically pass from one hand to another. If you are one of those people, having a credit card could lead to spending more money than you might have if you were paying in cash. Consider how spending on credit might impact your habits. Although it might seem like everyone has a credit card these days, there is a growing trend among Millennials to not use credit cards at all. Some financial experts say this will not benefit them because credit history can be important to your long-term goals. In the end, it’s your choice. If you don’t feel comfortable using one or aren’t ready for the responsibility of a credit card, don’t get one.

Visit any UFCU location for a free credit review. We’ll help you understand your credit score, answer any questions, and help you find your unique path to financial well-being.

Make the Right Decision for You
Responsible use of credit cards is a great way to earn and maintain a strong credit score and to show future lenders that you are responsible with your finances. Paying your credit card on time every month strengthens your history and your credit score, making you eligible for lower interest rates. Lower interest rates on large ticket items can save you thousands of dollars, for example, over the course of a mortgage or auto loan so, it’s worth it to pay attention to your credit health.

Credit cards also come with a significant responsibility, however. Although getting credit card rewards, points, and fraud protection are indeed benefits, these perks can sometimes lead people to spend more money than they have. Because credit cards often carry high interest rates, carrying debt on a card can start a cycle that is difficult for some people to escape.

Carefully weigh whether a credit card is right for you based on your own comfort level, your rate of spending, and your ability to be disciplined with your finances. For the right person, credit cards can be a big asset, especially if you want to improve your credit score or earn cash back, rewards, or points. However, if you’re not ready for the responsibility of credit cards, they can be a detriment, so it’s important to choose wisely and only spend as much on your credit cards as you can afford.