Advantages and Disadvantages of Credit Cards
Updated: Jan 23
There are many things we can discuss when reviewing the benefits and disadvantages of credit cards. These are just a few of each, but I hope it gives you a better perspective when assessing your lineup of credit cards or whether or not you want to add or cut future cards. Credit remains very important for most Americans as they will need to take out loans for mortgages and cars, so staying on top of your credit remains an important part of your financial plan. When used responsibly and paid off every month with a good side car that you utilize the benefits, credit cards are a great option. However, if you have too many cards you cannot keep track of the benefits and or fees, and carry any sort of balance from month to month, your behavior is extremely detrimental to your financial well-being. Responsible using credit can lead to positive financial cons, but using it responsibly can and continues to lead to financial ruin for many families.
Credit cards can be extremely beneficial when building credit so that you’re able to take out future loans at favorable rates. However, credit cards are not without their downsides. American consumers have sensationalized credit cards. We receive several new offers for credit cards in the mail every single week, and we are bombarded by subliminal messaging on television to take out more credit. I think that kind of needs to be used responsibly and intentionally and needs to provide value and not become a liability in the long-term.
The potential benefits of credit cards are that you have great consumer protections, you can earn points that have value, and you can build credit for future loans. Let’s briefly touch on each of these, how they are advantageous, and how to keep them in control.
Consumer Protection: Credit cards have an awesome consumer protection function. If your credit card gets stolen and there are fraudulent transactions on your card, your liability is zero. If the same thing happens with a debit card, you need to prove that the transactions are fraudulent, and your money may be tied up for up to 60 days. This makes credit cards very attractive to debit cards, as with a credit card the company eats the transaction as your agent, while with a debit card, the onus is on you to prove the fraudulent transaction.
The second positive of credit cards is that they can be used to build credit. Responsibly using credit and paying it off every month, helps to build your credit history, which lenders use to determine your eligibility for a loan. This becomes important throughout life when you are applying for a mortgage or a car loan. The credit score that you have corresponds to the rate you’re able to obtain. To obtain the best rates, do you want to have a credit score of 760 or higher. Quick ways to get the score up, hard to responsibly use credit, pay it off every month, keep it low credit utilization ratio, and do not close your oldest accounts.
The last benefit of credit cards is that you receive points that are worth value to redeem for cash or other purchases. Many times, this happens in the form of travel. Any credit card will give you points that can be redeemed for flights and hotels. I want to make very clear though, that this is a positive byproduct of responsible credit use, not the sole reason to own a credit card. You do not want to pay $100 to get two dollars off if you didn’t need to pay $100 in the first place.
Now that we have gone over the benefits, let’s go over some of the downsides of credit cards. Again, credit can be positive when responsibly used, but there are some caveats to that. Some of the main downsides of credit cards are overspending, long-term credit debt, and the illiquidity of rewards points. Let’s look at each of these downsides in more depth.
The first potential downside of credit cards is that research has shown how you overspend on a credit card compared to using cash or debit card. Research from Dave Ramsey shows that Americans spend 80% more using a credit card. This is completely psychological and has to do with the disassociation of you from the money that you’re spending. When you use a credit card, you don’t feel like you do when you’re using a debit card or cash. This is a problem, as the benefits of credit cards do not outweigh the downsides for the average American. No benefit is worth it if you spend 80% more on purchases.
The first disadvantage of overspending leads to the second one which is long-term high-interest credit debt. The average Annual Percentage Rate (APR) on a credit card ranges from 10 to 20%. This is extremely high and you do not want to have debt at this rate. Half of Americans are carrying a credit card balance from month to month that is accruing at double-digit rates of interest. This is unacceptable, and should never happen unless there is an emergency. Christmas is not an emergency, nor is there any other event that can be planned for or seen. Many Americans have problems with this, and this is why credit card companies continue to offer credit to Americans had an increasing rate.
The last main downside is the illiquidity of points, and the burden on consumers to track their benefits to properly utilize them. Many Americans with multiple credit cards do not completely use all the benefits they pay for. Sometimes these cards come with an annual fee, but if you don’t use the benefits properly and optimally, you are not coming out ahead. Also, the value of the points depreciates over time as credit card companies raise the prices of the flights and hotels. This is called point decay and eats into your credit card benefit. Also, the points are not always easily used. An example of this personally is when my wife and I spent 80,000 points on flights through American Express. We needed to change the flights the day before and were unable to do so through the airlines. We had to call American Express, and the wait to talk to a representative was two hours. You’re unable to change the flights, which infuriated me. We would’ve been better off just buying American flights directly through the airlines, and having the ability to change or cancel them. Points are a double sword they can be great when I work out, but when they don't, it is more of a pain than a benefit. Those factors are often overlooked when reviewing the benefits of credit cards.
There are many things we can discuss when reviewing the benefits and disadvantages of credit cards. These are just a few of each, but I hope it gives you a better perspective when assessing your lineup of credit cards or whether or not you want to add or cut future cards. Credit remains very important for most Americans as they will need to take out loans for mortgages and cars, so staying on top of your credit remains an important part of your financial plan. When used responsibly and paid off every month with a good card that you utilize the benefits for, credit cards are a great tool. However, if you have too many cards you cannot keep track of the benefits and or fees, and carry any sort of balance from month to month, your behavior is extremely detrimental to your financial well-being. Responsible credit use can lead to positive financial outcomes, but using credit irresponsibly can and continues to lead to financial ruin for many families.