What Are the Advantages of Credit Cards?
A credit card is a convenient financial product that can be used for everyday purchases such as gas, groceries, and other goods and services. It can also be a great resource for purchasing big-ticket items such as TVs, travel packages, and jewelry because the funds for these items are not always immediately at our disposal. Beyond convenience, other advantages of credit cards include providing cardholders with the opportunity to build credit, earn rewards and cash back, and protect against credit card fraud. This guide will review the following:
When making a purchase with a credit card, it’s important to remember a credit card primarily acts as a short-term loan that needs to be paid back. This loan has an annual percentage rate (APR) which is the rate you’ll pay if interest charges accrue, according to the terms of your credit card agreement. The APR is determined by many factors, including a person’s creditworthiness, payment history, and the type of credit card. Someone with a strong credit history may have a lower rate than someone with little or no credit history.
Credit cards differ from debit cards in that a debit card is linked directly to a money market or checking account and debited from the available balance in that account. There is no monthly bill or interest charges because, unlike a credit card, there is no money due after the transaction. In addition, credit cards provide you with an opportunity to build credit whereas debit cards do not.
Credit cards have a credit line, which is the maximum amount of credit available to make purchases. The credit line is determined by many factors, including a person’s credit history, income, and how much of their current available credit they are using. As purchases are made, the available balance is the amount usable to spend at that given moment. As an example, if someone has a $1,000 credit line but makes a purchase for $200, they will then have $800 as an available balance.
What Are the Benefits of Using a Credit Card?
When used responsibly, credit cards can be valuable tools for earning rewards, traveling, handling emergencies or unplanned expenses, and building credit.
A rewards credit card does exactly what its name implies: rewards the cardholder for making purchases. Rewards can vary by issuer and card type. Some rewards come in the form of cash back, discounts on gas station purchases, and even travel miles. For those who use their cards regularly, earning rewards is one of the primary advantages of credit cards, as cardholders can redeem them for things they were going to purchase already as well as the occasional treat.
Credit cards can also be beneficial when traveling. This is because some major car rental companies and hotels require a hold on a credit or debit card to reserve a vehicle or book a room. This procedure can take several days or longer. During this time, the amount of the hold on either a credit or debit card is not available to use. Because you may not have the necessary funds in your bank account, credit cards increase your purchasing power, providing you with the required funds at the time they are needed.
Some credit cards offer fraud alerts to serve as a safety net if someone experiences a theft of their card or information when traveling. In the case of potentially fraudulent activity, an alert may be sent via a phone call, email, or text message, and the transactions can be stopped. Because a credit card isn’t linked to a checking or savings account, there is less risk of the thief gaining access to the money in these accounts. Additionally, with Discover’s $0 Fraud Liability Guarantee, you’re not responsible for unauthorized purchases on your Discover credit card.
How Do I Use Credit Cards Responsibly?
Like most financial products, the advantages of credit cards are best enjoyed when cards are used responsibly. It is essential for anyone who decides to open a line of credit to consider how they plan to make the payments and how to use their newfound purchasing power responsibly.
It can be beneficial to use a credit card for purchases that allow for the balance to be paid off within a reasonable time frame. If there is no plan to pay off the balance, however, it will likely continue to accumulate interest, reduce spending power and potentially limit the benefits of having a credit card. A good rule of thumb for using credit cards responsibly is not to use them for impulse purchases or unaffordable items if you cannot pay it off within a reasonable amount of time.
Credit cards offer balance transfer options, and responsibly maintaining these benefits is important. A balance transfer is when someone moves the balance on one or multiple credit cards to another credit card. The transferred balance is then subject to the interest rate and terms of the new card. Credit card issuers may offer limited-time, zero percent introductory interest balance transfers to new applicants and cardholders or existing cardholders with a low balance. In some instances, there may be fees associated with a balance transfer and after the introductory offer, interest rates may apply. When utilizing a balance transfer offer, make sure to read the terms and conditions and plan on responsibly paying off the balance prior to the end of the introductory offer to avoid paying interest on the remaining amount.
Which Card Should I Apply For?
According to a 2016 Experian study, credit cards are a popular financial tool used by Americans in every age group, with baby boomers carrying an average of 2.93 cards in their wallets. Gen Xers have the second highest number (2.56), and millennials carry an average of 2.02 cards. With so many cards to choose from, it may be tempting to use multiple cards. However, if you are looking to simplify your payments, the best option may be to find a card that has all of the desired features (e.g., cash back, no annual fee, etc.).
Deciding on a credit card should be considered as much as any other financial decision, like applying for an auto or home loan. Cards vary by issuer and type, so what works for one person may not be the best option for another.
For someone who frequently travels – for business or pleasure – a travel or miles card offered by credit card issuers could be a good choice. Depending on the card, there can be rewards for everyday purchases. A cash back credit card may be a better choice for those who enjoy being rewarded for making those purchases. Some cards offer cash back on daily purchases and enhanced rewards that can be activated in specific categories up to a maximum that rotates on a quarterly basis. For students, there are often special credit cards with programs designed for someone beginning their financial journey.
Cash back bonuses can typically be applied toward your statement balance, may be redeemed for gift cards, or sometimes even used to pay for purchases directly at another retailer. Knowing which types of cards are available and what they offer is a major step in comparing the cards for which to apply.
Speaking of applying for a credit card, below is a checklist of what you will most likely need to complete a credit card application. Note that this may vary by issuer and card type.
Armed with the knowledge of how credit cards work, the benefits they can provide, and how to use them responsibly, it might be time to take the next step and find that perfect card.
Whichever card you choose, make sure it works hard for you. Discover it® will match all the cash back rewards you earn, dollar for dollar, at the end of your first year – there’s no limit to how much you can be rewarded*. Learn more here.
*Cashback Match™: After the first 12 consecutive billing periods that your new account is open, we will match all of the cash back rewards you’ve earned and apply them to your account in the following one or two billing periods. If your account is closed or no longer in the cash back reward program at the time we calculate your potential award, your cash back will not be matched. You’ve earned cash back rewards when they have posted to your account by the end of the 12th consecutive billing period. This promotional offer may not be offered in the future. This exclusive offer is available only to new cardmembers.