Credit cards may have their detractors, but they're still extremely popular. A whopping 82% of American adults had a credit card in 2022, according to credit card data gathered by The Motley Fool Ascent. That same year, credit cards accounted for $5.6 trillion in purchases.
If you normally stick to a debit card or cash, you might figure there's no need to use credit cards. But those 82% of Americans have the right idea, as there are several benefits to paying this way.
A safe way to pay for purchases
Credit cards are a safer way to pay than debit cards or cash. Your debit card is connected to your bank account, which is a big risk if it's lost or stolen. Someone could use it and drain funds from your bank account. To be fair, you could report the charges as fraud and get your money back. But it may take time for your bank to investigate and refund you.
With credit cards, you don't have that worry. A credit card is a line of credit that you pay back. If there are fraudulent charges, you can dispute them. Your card issuer will issue a temporary credit for that amount. Once it confirms those charges are fraud, your temporary credit becomes permanent. You never lose any of your own money during the entire process.
Many credit cards also offer complimentary protections on eligible purchases. Here are a few examples of the kinds of protections you can get with a credit card:
- Purchase protection that covers new purchases that are damaged or stolen
- Extended warranty coverage that automatically extends the manufacturer's original warranty
- Rental car insurance for theft and collisions
- Travel protections, such as lost luggage reimbursem*nt, baggage delay insurance, and trip delay insurance
Building credit
Your credit score is important, for many reasons. It affects the interest rate you pay on loans. If you plan to buy a house, a high credit score could save you hundreds of thousands in interest. In most states, your credit score can even affect your car insurance rates. Drivers with poor credit pay over twice as much as drivers with excellent credit, on average.
A credit card is one of the best ways to build credit. To improve your credit, you need to show that you can borrow money and pay it back on time. If you use a credit card every month and pay the bill by the due date, your credit score will go up. It doesn't help your credit score to pay with a debit card or cash.
Earning rewards
There's also a financial incentive for using credit cards: rewards. Many credit cards earn rewards on the purchases you make. There are two popular types of rewards credit cards:
Cash back cards work just like the name suggests; you earn a percentage back on each purchase. If your card earns 2% back on purchases, and you spend $500, then you get $10 in cash back. You can redeem that as a statement credit on your credit card bill or transfer it to your bank account. Over time, this can add up. If you spend $30,000 a year with a card that earns 2%, that's $600 in cash back.
Travel rewards cards earn points or miles that you can use for travel. These are more complicated, and the way you can use travel rewards depends on the card you have. But for frequent travelers, travel credit cards can be extremely valuable.
Making sure you benefit from credit cards
Credit cards have lots of benefits, but there's also the risk of going into debt. Unfortunately, many Americans get into trouble with credit cards. The average credit card balance is $6,365, and average interest rates were above 22% last year.
To ensure that credit cards are working for you and not against you, always pay your credit card bill in full. When you pay in full, the card issuer doesn't charge you interest on your purchases. You can get all the benefits of using credit cards without the expensive interest charges.
