What are the Advantages of Credit?
Credit allows you to spend borrowed money using credit cards and loans. What are the advantages of credit, and how do they compare to the drawbacks?
October 10, 2022
Credit allows you to spend using borrowed money. Credit cards are among the most common forms of credit, with an estimated 80% of American adults having at least one credit card.
Using credit cards and other types of credit has both pros and cons to consider. Some of the advantages of credit cards are flexible spending, purchase protections and credit card rewards. The downsides include extra costs for interest and the potential to get into debt.
In this guide, we’ll focus on some of the advantages of credit and credit cards — while also warning about some of the potential pitfalls.
What are the advantages of credit?
Credit cards can provide flexibility, purchase protection, rewards and more. Here are some of the key advantages of using credit cards.
Cash flow refers to the money flowing in and out of your accounts. Paychecks come in, bills go out — and it’s up to you to make sure everything balances out.
Credit cards can help with managing cash flow. For instance, say you get paid once per month, but you have bills spread out all throughout the month. In this case, you can put those bills on a credit card, then pay off the card once you get paid.
Credit cards can be useful for covering short-term gaps in funds. Plus, remember that you won’t pay any interest if you pay off your card in full. Credit cards only charge interest if you carry a balance. As long as you pay the full balance by the due date, you won’t pay any interest.
Credit card rewards
Many credit cards offer rewards or cash back. For instance, a card might offer 1% cash back, meaning you’d earn $1 for every $100 you spend using the card. Other cards offer airline miles or other rewards points.
Credit card rewards can help you earn a bit of bonus money for paying for everyday expenses. If you pay off your card balance in full, you won’t pay interest — and your rewards will just be a bonus.
Fraud might occur if someone steals your credit card, obtains your personal information or gains access to your online account. Fortunately, credit cards have fraud protection and prevention measures built in.
One major advantage of credit cards in this regard is that the payment for charges isn’t due immediately. You will have time to report the fraud and get everything sorted out before any payment is due. With a debit card, funds are withdrawn from your account right away, potentially leaving you with a shortfall of funds until the fraud is resolved.
Many credit cards also come with purchase protection built in. This might include extended warranties, insurance or other perks. You typically get these benefits simply by purchasing an item using a credit card. Some cards may also have travel protections, like trip cancellation coverage or insurance coverage on car rentals.
Using a credit card responsibly can help you build credit and improve your credit score. By making on-time payments, you can build a consistent payment history, which will gradually boost your credit score. The benefits of good credit include lower interest rates, a wider variety of financing options and more.
What are the disadvantages of credit?
Using a credit card involves spending borrowed money, so it can easily lead to debt if you’re not careful. Here are some of the potential downsides of using credit cards and loans.
Buying more than you can afford
Credit cards can make it tempting to overspend. After all, they enable you to spend money that you don’t yet have. This can be a slippery slope and can lead to overspending and high-interest debt.
Credit cards charge interest when you carry a balance. Credit card APRs (annual percentage rate) can be very high, with the average now well over 21%. This can be very costly in the long run.
To visualize the impact of interest, you can use a credit card interest calculator.
Many credit cards have annual fees. These can range from as little as $25 to several hundred dollars. Annual fees are charged regardless of how you use the card.
Negative impacts on credit score
Using a credit card can benefit your credit score, but it can also hurt it if you don’t use credit responsibly. Missed or late payments can ding your score, as can carrying too large of a credit card balance. If you’re not confident that you can use credit responsibly, it’s best to avoid it altogether.
Cash vs. credit
In many cases, using a mix of cash and credit makes sense. We’ve already explored the benefits of credit, but there are certain situations in which using cash is superior.
For example, some merchants might offer a cash discount if you pay by cash or check. Similarly, some merchants may charge extra to use a credit card. For instance, it’s sometimes possible to pay rent with a credit card — but it may incur fees of 3% or more. In this case, it makes more sense to simply pay cash.
Using credit: What to watch out for
If you do decide to use credit, it’s important to keep an eye on things and proceed with caution. Here’s what to keep in mind.
Paying credit card balances in full
Each month, you’ll receive a credit card statement outlining the purchases you’ve made and what you owe. There will also be a statement balance, and a due date (usually around 3 weeks after the statement date). If you pay the full statement balance by the due date, you won’t pay any interest. But if you make a smaller payment, you’ll be charged interest.
Watching out for fees
Credit cards have a variety of fees, including annual fees, late payment fees, balance transfer fees, and more. If you’re not aware of these fees, they can add up very quickly. Fortunately, most fees are avoidable with responsible use of your credit card.
Overspending can be a slippery slope, and it’s much easier to overspend when using credit cards. The temptation to overspend can get even more serious once you have higher credit limits. To keep your spending in check, it’s a good idea to make a budget — and stick with it!
Monitoring accounts for fraud and fees
It’s important to keep an eye on all your accounts, even if you don’t use them regularly. There are two reasons for this.
Fraud can occur at any time. It’s important to check your account regularly to make sure there aren’t any unauthorized transactions. Plus, you’ll want to keep an eye out for annual fees and recurring charges that you have forgotten about.
At a minimum, you should check all your credit accounts once every few months.
The advantages of credit are powerful — but they require the responsible use of credit. Credit cards can either be a beneficial tool or a source of high-interest debt, depending on how you use them.
If your credit card debt is getting out of hand, Tally† may be able to help. Tally is an app that helps qualifying Americans consolidate credit card balances into a lower interest line of credit. Learn how Tally works here.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. Based on your credit history, the APR (which is the same as your interest rate) will be between 7.90% - 29.99% per year. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.