Are Credit Cards Bad?

Benefits of Credit Cards

Many credit cards offer benefits and perks that make them a good option for everyday purchases, and sometimes for making larger purchases as well.

Fraud Protection

Most credit cards offer zero liability protection. If someone steals your credit card or gets ahold of your card's information from a data breach, you generally won't be responsible for the transactions you didn't authorize.

Although many debit cards offer similar protections, using a credit card might be better because the card isn't tied directly to your bank account. As a result, you won't need to wait for a bank to reimburse you if you have to dispute fraudulent transactions.

Rewards and Cardholder Perks

Credit cards often offer cash back, points or miles on your purchases. You might be able to earn around 1% to 5% in rewards on your purchases—and sometimes even more depending on the purchase and how you redeem the rewards.

Some cards also offer cardholder perks that can help you save money or time, or benefit you in other ways, such as:

• Statement credits after making specific purchases
• Purchase protections and extended warranties
• Travel insurance and protections
• Cellphone protection
• Elite status in loyalty programs
• Access to airport lounges
• Free hotel nights or airline companion passes

You can compare credit cards' benefits before applying to see which cards offer perks that align with your lifestyle. Credit card benefits can also change over time, so try to review your card's benefits to make sure you're not missing out.

Promotional Interest Rates

Some credit cards offer a promotional interest rate, such as an intro 0% annual percentage rate (APR) on purchases. The promotional rate only lasts a limited time, and the card's standard interest rate could apply to any remaining balances. However, the promotional rate could still make a credit card a good option for financing large purchases.

Review the promotion's terms before opening a card for a large purchase. Some cards offer deferred interest instead of an intro 0% APR. With deferred interest offers, all the interest that accrues since your purchase gets added to your balance if you don't pay off the card before the promotional period ends.

Building Credit

Most credit card issuers will report your credit card to all three major credit bureaus—Experian, TransUnion and Equifax. Your credit card can then be included in your credit reports and affect your credit scores.

A credit card can help your credit in many ways, especially if you keep the card open, pay your monthly bill on time and only use a small portion of your card's available credit limit.

Learn more: How to Use a Credit Card to Build Credit

Drawbacks of Credit Cards

In spite of the many potential benefits they offer, the convenience of credit cards can also be a negative. Average credit card balances reached $6,501 in the third quarter of 2023—a 10% increase from the previous year, according to Experian data.

High and Variable Interest Rates

Credit cards often have high interest rates and a variable APR, meaning the rate can change at any time. If you don't pay your statement balance in full, and you don't have a promotional rate, the revolved balance starts to accrue interest. Additionally, new purchases will start to accrue daily interest immediately.

For larger expenses, a personal loan or home equity line of credit may offer a lower rate. And buy now, pay later financing might be less expensive for smaller purchases.

Temptation to Overspend

It's easy to borrow money when you have a credit card, especially if the card is saved on your computer, phone or in another digital wallet. The availability can lead to impulse purchases and overspending, forcing cardholders to decide between paying for household necessities and paying off their credit card bill. Household necessities rightfully take priority, but that's also how you can wind up carrying a balance and accruing interest.

Can Hurt Your Credit

Although credit cards can help you establish and improve your credit, they can also hurt your credit in different ways if you're not careful.

When you first apply for a card, the resulting hard inquiry and having a brand-new account in your credit report could hurt your scores. Using a large portion of your card's available credit can also lead to a high credit utilization ratio—lower utilization ratios are best for your scores.

Missing your minimum payment by at least 30 days can cause credit scores to drop significantly. And if you don't bring your account current, the card issuer may send your account to collections. It takes seven years for the resulting negative marks to fall off your credit reports.

Fees

Credit card fees can quickly add up and catch you off guard. Watch out for:

• Annual fee
• Foreign transaction fee
• Cash advance fee
• Balance transfer fee
• Late payment fee

Most of these fees depend on how you use and manage your card. The annual fee is an exception, although there may be ways to get the fee waived or refunded. There are also lots of great cards with no annual fee.

How to Use Credit Cards Responsibly

You can use your credit card responsibly by understanding the card's terms, how credit card interest works and how to budget for credit card payments. Ideally, you can:

• Only use credit cards for purchases you can afford to pay off in full within a month.
• Pay your statement balance in full each month to avoid accruing interest.
• Pay down your balance early if you're using a large portion of your available credit to lower your credit utilization ratio.
• Set up account alerts to remind you about balances and due dates.

Realistically, life happens. Several emergency expenses pop up at the same time, you have to book unexpected travel or your income drops and you can't afford all your bills.

Using credit cards to cover necessary expenses and paying off the bill over time isn't necessarily irresponsible, even if it means paying interest as well. But try to make more than the minimum monthly payment and create a plan to pay off your card.

Get Matched With Your Next Credit Card

If you think the benefits of a credit card can outweigh the drawbacks, it's time to figure out which card will be best. Whether you're looking to earn travel rewards, finance a purchase or build your credit, there are credit cards that align with your goals. But your credit score can affect your options. Using your free Experian account, you can get matched with card offers from our partners based on your unique credit profile.