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With the Federal Reserve Bank reporting that 79% of Americans have at least one credit or charge card, there’s no doubt that it’s a popular form of payment. But just because so many people are using credit cards doesn’t mean that it’s the right choice for everyone. Credit cards are powerful financial instruments that can provide valuable benefits when used responsibly. On the other hand, they can also cause great harm to your finances when they aren’t properly managed.If you find yourself asking, "When should I get a credit card?," keep reading to find out more.
What Is a Credit Card?
A credit card is a rectangular piece of plastic or metal that represents your credit card account. A credit card account is a revolving loan that isn’t secured by any property. How credit cards work is they connect you to payment networks that allow you to make purchases from retailers that are part of the same network.
Why Should I Get a Credit Card?
You can use credit cards to finance purchases or simply as a method of payment. When credit card users pay off their entire statement balance in full, nearly all credit card issuers will waive interest charges. Credit card users also enjoy strong legal protections against fraud and billing errors. Some credit cards can also offer rewards for spending in the form of cash back, points or miles, which are certainly worth taking into consideration when choosing a credit card. Credit cards may also provide valuable benefits including travel insurance policies, purchase protection benefits and other perks.
When You May Consider a Credit Card
A credit card can be the right tool for multiple purposes. First, it can be a good choice as a method of payment. Credit cards are very secure, as your account is protected by the Fair Credit Billing Act of 1974, which limits your losses to a maximum of $50 in the event of fraud or billing errors. But, in practice, every major credit card payment network has $0 liability policies. And credit card users find it much more convenient to use their cards rather than carry cash or checks.Credit cards can also be used as a means of financing purchases. As a revolving loan, you can make a charge to your credit card and pay it off on any schedule you choose. All you have to do is ensure that you make a payment each month of at least the minimum amount and that your payment is received by the due date. This does, however, require reading your credit card statement carefully. If you avoid interest charges by paying your balance in full each month, then you’ve essentially received an interest-free short-term loan. The loan’s term could be even longer if you’re able to get one of the top 0% APR credit cards. But even if you choose to carry a balance or don’t have an introductory offer, you’ll be taking out a flexible loan that begins when you make your purchases and ends when you pay off your entire balance. Plus, credit card interest rates are often lower than other unsecured loans like payday loans and financing options offered by retailers. Still, their rates can be higher compared to other types of secured loans, such as mortgages or car loans.Using credit cards also can be a great way to enjoy valuable rewards and benefits that aren’t available from other forms of payment. Specifically, credit cards can offer the following rewards and benefits:
Cash back
Travel rewards like hotel points and airlines miles
Travel benefits like rental car insurance and trip interruption coverage
Extended warranty policies
Damage and theft protection plans
And last but certainly not least, credit cards can be a great tool to help you build your credit history and improve your credit score. When done responsibly, using your credit card adds positive information to your credit history each month.
When You Might Not Get a Credit Card
As valuable as credit cards can be, they are not right for every situation. For example, those who are unable to manage a credit card responsibly shouldn’t be using one. Using your credit card responsibly means paying your bills on time and carrying very little — if any — debt. When you make your payments late or carry a large amount of debt, then your credit card issuer will report negative information to the major consumer credit bureaus, which will hurt your credit score. You also generally should not apply for a credit card if you’ve recently applied for other credit products or plan to purchase a home or a car in the near future. This is because applying for too many loans or lines of credit in quick succession can result in numerous inquiries on your credit report, which can cause a dip in your credit score.Another instance in which you may not get a credit card is if you’re under the age of 18, as most credit cards requirements include being at least 18 in order to apply. You also must be a U.S. citizen or a legal permanent resident to apply for a credit card. If you don’t meet these qualifications, then being approved for a credit card likely is not an option for you.
Pros and Cons of Having a Credit Card
When you’re weighing the question of whether you should get a credit card, it’s important to understand the upsides and the drawbacks. The benefits of having a credit card include:
Having a secure and convenient method of payment
The ability to finance purchases
Earning rewards and benefits
Building your credit, when managed responsibly
Meanwhile, the drawbacks of credit cards can include:
Possibility to get into debt and harm your credit score
Incurring interest at higher rates than other types of loans
Paying annual fees and other fees, such as for late payments or balance transfers
How to Avoid the Credit Card Trap
For some people, credit card use leads to a seemingly never-ending cycle of debt. This cycle can start by opening up a credit card with a 0% APR introductory financing offer. These offers are only temporary, however, and you’ll start paying interest on your unpaid balance as soon as the promotional financing offer expires. Once that happens, some credit card users can have trouble making the minimum payment each month and may use up their line of credit just trying to pay for their basic living expenses.To avoid getting into a credit card trap, it’s best to think of the card as just another method of payment. Don’t make any charges that you can’t immediately pay for, and strive to avoid interest by paying your statement balances in full every month. And if you can’t for whatever reason, make sure you know how to calculate credit card interest.If you’re unable to control your debt, using a credit card may not be the best choice for you.
Alternatives to Having a Credit Card
Credit cards are just one of a number of ways to finance purchases and build your credit history. If you don’t think you should apply for a credit card at this time, there are alternatives to explore.
1. Paying Bills and Loans on Time to Build Credit
One way to build credit without a credit card is to simply pay your bills on time, including payments for other types of loans. There are services like Experian Boost that can help you improve your credit score by allowing you to get credit for paying bills, such as for utilities and streaming services, that otherwise wouldn’t usually count toward building your credit history.Additionally, if you have another loan such as a car loan, a home mortgage or a personal loan, paying it on time also will help build your credit so that maybe someday you’ll have a score high enough to consider one of the best credit cards currently on the market.
2. Getting a Credit Builder Loan
Credit builder loans are another way to build your credit without a credit card. With these loans, which are designed for those with low or no credit, you don’t get access to the money you’re borrowing until you’ve already paid for the loan in full. Your lender will put money down on deposit first. Then, you’ll make fixed monthly payments to the lender and after the loan is paid off in full and on time, the lender will make the funds available to you. Your payments are reported to the major consumer credit bureaus, which can help you build a credit score.
3. Becoming an Authorized User on Someone Else’s Card
Being an additional authorized user on someone else’s credit card is another way to potentially build your credit score and make payments. As an authorized user, you will be added to another person’s card and then may be able to make purchases. Even though you aren’t legally responsible for making payments (that’s the primary card holder’s responsibility), the card holder’s on-time payments will go toward building your credit history.
Considering Applying for a Credit Card? Compare Your Options With Lantern
The answer to the question of whether you should get a credit card ultimately comes down to whether you fully understand the benefits and drawbacks of credit cards and if you’re prepared to use your card responsibly. Credit cards can serve as a powerful financial tool — but they can also harm your finances and credit score if not used responsibly. A big part of making sure this will happen is finding a credit card that suits your needs and lifestyle. Lantern by SoFi makes it easy to compare credit cards so you can see the options that may be available to you.
Frequently Asked Questions
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About the Author
Jason Steele
Jason Steele has been writing about credit cards and award travel since 2008. One of the nation's leading experts in this field, he has contributed to dozens of personal finance and travel outlets and has been widely quoted in the mainstream media.
