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Using a credit card to make purchases can offer such benefits as convenience and rewards. Whether you’re shopping for shampoo or a new sofa, there are many ways that you can pay for goods and services, including cash, debit cards, and credit cards. Not every merchant may accept each of these forms of payment, but credit cards are one very popular and useful option.
Read on to learn more about the benefits of credit cards vs. other forms of payment to help decide when to break out the plastic and when to use something else instead.
Key Points
• Credit cards provide convenience through wide acceptance for in-person, online, and phone purchases.
• Rewards programs may offer benefits like cash back on purchases or miles or points, advantages not available with debit cards.
• Fraud protection features typically include zero liability policies from many issuers, protecting cardholders from financial responsibility when fraudulent activities are reported promptly.
• Automatic spending categorization and online account tracking may simplify budget management.
• Responsible credit card usage, including timely payments each month, could help build positive credit history and may positively impact credit scores over time.
What Is a Credit Card?
The literal definition of a credit card is a small rectangular piece of plastic or metal used to make purchases; users may borrow funds up to a predetermined credit limit. Credit cards are issued by financial service companies and they allow cardholders to access a revolving line of credit to pay for goods and services.
Credit cards are different from debit cards in that they aren’t directly linked to your checking account and don’t immediately deduct money from it. They also vary from a personal loan or a personal line of credit.
• When comparing a personal line of credit vs. credit card, both are types of revolving credit, they report your balance and payment info to the major credit bureaus, and charge interest. But unlike credit cards, personal lines of credit don’t offer rewards. They can have a lengthy application process and sometimes a lower borrowing limit than credit cards.
• When comparing credit cards vs. personal loans, they both allow a borrower to access money that needs to be paid back later. However, credit cards are a form of revolving debt (meaning you can borrow money repeatedly, up to a limit), while personal loans, which offer borrowers a lump sum of money to be repaid in regular installments over time, are not.
Why Are Credit Cards Useful?
Credit cards can be useful for paying for everyday purchases, however big or small. Some of the benefits they offer include the following:
• They are convenient to carry and use.
• They can allow you to spend and then pay off your debt over time.
• There’s typically a grace period before you begin paying back the debt, an advantage over debit cards.
• They may offer rewards, such as cash back.
• Credit cards typically offer fraud protection.
• Used responsibly, credit cards may help build credit history.
Credit Card Benefits
As noted, there are many potential benefits to having and using a credit card. As long as you use your credit card responsibly, these perks can be useful. Benefits to having a credit card include rewards, tracking your spending, security, convenience and building credit. Here’s a closer look.
May Be Safer to Carry and Use
If you lose a credit card or it gets stolen, you most likely won’t be held financially responsible for fraudulent purchases that someone else may make with your credit card. In some cases, you might be liable for no more than $50, even if someone charged much more on your card. Credit cards may also protect you when you have a dispute with a merchant.
On the other hand, if you lose cash or it gets stolen, there is almost no way to track that cash down and get it back.
Credit Card Rewards
Credit card rewards can come in different forms. Some credit cards offer a flat-rate percent back on every purchase you make. Others have bonus categories where you can earn a higher rate of rewards on those purchases.
Credit card rewards can come in the form of cash back (say, 2% cash back on purchases), miles, or points that you can use for travel or other things. However, while the promise of rewards can be enticing, overspending to get additional credit card rewards likely isn’t a good idea.
Track Spending
Credit cards may help make it easier to track your spending. If you use cash or check, you might have to keep track of your spending yourself, whether by paper or by creating your own electronic system or file.
With a credit card, all of your spending shows up online in your account. Plus, some credit card issuers automatically categorize your purchases into different types of spending, which can make it easier to stick to your budget. You can see how much you have spent in different categories each month, and you can export the data to some popular budgeting apps.
Security
Many credit card issuers offer zero fraud liability to cardholders, which can add a layer of security. This means if you report fraudulent activity on your account to your card issuer right away, you likely won’t be liable for those fraudulent activities. The issuer will usually refund the amount fraudulently charged to the card and issue a new card and card number to the cardholder.
Plus, many card issuers have alert systems that notify cardholders via email, text, or phone call when suspicious activity is detected. Cardholders can confirm or deny that they made these purchases. This allows any potentially fraudulent activity to be caught quickly.
These protections are not available for most debit cards and obviously not when you are using cash.
Convenience
Visa and Mastercard, two of the most common credit card networks, are accepted nearly everywhere worldwide. American Express and Discover, the other two credit card networks, are widely accepted in the U.S. and sometimes in other countries. Wide acceptance makes credit cards convenient to use for everyday purchases.
Credit cards can be used in person, online, or over the phone to make purchases. They are also easy to carry with you, and you don’t need to think about replenishing your money like with cash.
Building Credit
Responsible use of a credit card may help you build credit. If you pay at least your minimum amount due on time each month, it may positively impact your credit score over time. (You’ll want to avoid, however, letting your credit utilization, or the percent of your credit limit that you spend, get too high.) Having good credit is important for many reasons, including getting a mortgage, applying for a job, or renting an apartment.
When Not to Use a Credit Card
There are, however, times when it doesn’t make sense to use a credit card.
• If you have to pay an extra fee to use the credit card, it may make more sense to pay by another method that doesn’t come with a fee, like cash, check, or debit card. Merchants pay processing fees when customers use credit cards and sometimes merchants pass along those processing fees to the customer. Unless the credit card rewards are high enough (like if you are working on a credit card sign-up bonus) that it offsets the fees, you are typically better off avoiding those fees.
• Also, if you are carrying a balance and don’t expect to pay it off this month, you are likely paying not just for your purchase but for interest charges as well. So it may be wiser, if possible, to use cash or a debit card when making a purchase.
• Credit cards may also not be the best choice for those who have a hard time controlling their spending. Since purchases made with a credit card don’t come directly out of a person’s bank account, it may be tempting for some people to spend more than they can really afford to. Someone who is an impulse shopper, for instance, may want to proceed with caution.
Examples of Credit Card Usage
Credit cards can be used to pay for goods and services. You can also finance purchases with a credit card. And you can use your credit card benefits, such as travel insurance and purchase protection.
Here are two hypothetical examples of credit card usage:
• Say that you are looking to book a plane ticket to your friend’s destination wedding. It looks as if prices are only going to rise, but you don’t have that sum of money available. You could use your credit card to book the flight, and then pay it off over time.
• Or you might be out for a run and, on your way home, remember that you’re out of coffee. If you have your credit card zipped into a pocket, you can easily pay for your coffee vs. having to go home, grab your wallet, and head out again.
Recommended: What to Buy With a Credit Card to Build Credit
Examples of Credit Card Issuers
A credit card issuer is the company that provides the credit card to the consumer. Issuers approve or deny a credit card application, decide how much credit to extend to the customer, determine the terms and benefits, and collect cardholder payments.
Some of the major credit card issuers include:
• American Express
• Bank of America
• Capital One
• Chase
• Citi
• Discover
• U.S. Bank
• Wells Fargo
Examples of Credit Card Networks
Credit card networks facilitate transactions between merchants and card issuers. They charge merchants fees for processing consumers’ card transactions.
The four major credit card networks are:
• American Express
• Discover
• Mastercard
• Visa
American Express and Discover are also credit card issuers. The other credit card issuers typically use either Visa or Mastercard networks.
Credit Card Tips
Understanding how credit card payments work is important so that users can maximize the credit card’s benefits. Some strategies to help do that include:
• Only charging what’s affordable, and paying bills on time each month.
• Paying the full balance if possible, or aiming for at least more than the minimum amount.
• Reviewing credit reports regularly to make sure everything is accurate.
• Not sharing a card number, card verification value (CVV), or additional details with anyone else.
The Takeaway
Credit cards have many benefits. They can be convenient; offer rewards like cash back; and provide some protection in case of loss, fraud, and disputes. Many people find credit cards a convenient way to make a large purchase and pay it off over time. However, using a credit card responsibly is important for helping the benefits outweigh the downsides.
Looking for a new credit card? Consider credit card options that can make your money work for you. See if you're prequalified for a SoFi Credit Card.
FAQ
Do credit cards help your credit score?
Responsible use of a credit card may positively impact your credit score. If you pay at least the minimum due on time every month (or ideally, more than the minimum), you can establish an on-time payment history, which is a positive thing. However, you need to watch your credit utilization ratio, the amount of your credit card limit that you are spending.
Can store credit cards help you build credit?
Different types of credit cards might help build credit, as long as the user is paying their debt on time and maintaining a low credit utilization ratio, and the card issuer reports this data to the credit card bureaus. Store credit cards may help build credit as long as the card and the cardholder meet this criteria.
What are the benefits to credit cards?
There are a number of potential benefits to having and using a credit card. These include rewards, helping to track spending, convenience, and possibly, when used responsibly, building credit.
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