A credit card is a plastic or metal card issued by a financial services company, which allows you to temporarily borrow the funds to pay for a product or service. By using the card, you agree to follow certain conditions regarding payment dates, interest and fees.
You’ve probably heard conflicting opinions about getting a credit card. But there’s a good chance that at some point in the future, you may need or want to take out a credit card. Here’s what to consider.
Credit Cards vs. Debit Cards
At first glance, a credit card and a debit card appear nearly identical. They both have an expiration date and generally feature a 16-digit number. But that’s really where the similarities end.
A debit card comes with a four-digit personal identification number. Once you enter your PIN during a purchase, the card immediately draws from funds in your checking account.
In comparison, a credit card gives you access to a line of credit issued by a financial institution. You can access up to a certain credit limit and use the funds for purchases or cash advances.
Credit cards are also used to build your credit score, while a debit card won’t affect your credit at all. You can also earn points, travel miles and cash rewards for making purchases with a credit card.
What Are the Benefits of Using a Credit Card?
Credit cards sometimes get a bad rap, but there are many advantages to regularly using credit cards.
Here are some of the biggest benefits to consider:
- Building credit: Using a credit card responsibly can help build a good credit score over time. Make small charges and pay them off in full each month by the due date to demonstrate responsible use of credit and dedication to making payments on time.
- Fraud protection: Credit cards also offer better fraud protections than debit cards. Providers like Mastercard offer zero-liability coverage for unauthorized usage.
- Earning cash and other rewards: Using a rewards credit card is a great way to earn cash and other rewards for purchases you were planning to make anyway. You can often qualify for a one-time cash bonus if you spend a certain amount of money after opening the card. And you can also earn cash-back rewards or frequent flyer miles just for spending money on your credit card every month.
Should You Get a Credit Card?
While credit cards come with many benefits, they do often come with very high interest rates as well. So taking out a credit card won’t be the right choice for everyone. That being said, getting a credit card could be a good choice in the following situations:
- Establishing credit: Responsible use of a credit card can help you establish your credit. A positive credit history can make it easier to gain approval for loans and other lines of credit with attractive rates.
- Receiving points and other incentives: When you earn credit card rewards, you receive free money or other incentives for making purchases you likely would make anyway. For example, if you regularly travel for business, then it makes sense to take out a card that lets you earn travel rewards.
- Price protection: If you make a purchase using your credit card and later see the same product advertised at a lower price, you may be eligible for price protection. That means you can file a claim and request a refund for the difference in pricing.
- Protections for large purchases: Some credit cards provide purchase protection against theft or damage. This perk could be helpful if you’re planning to make a very large purchase and want to safeguard your assets.
What To Consider Before Opening a Credit Card
Before opening a credit card, consider whether or not it’s the right choice given your situation. For instance, if you have a history of racking up credit card debt, getting one may not be a good idea.
After all, using a credit card will only help build your credit score if you use your credit line wisely and make monthly payments in full and on time. For the sake of your financial future, you should only take out a credit card if you can use it responsibly.
If you’re not sure if you can manage a credit card responsibly, you might consider taking out a secured line of credit. Instead of borrowing the money, you’ll make a one-time deposit to the card upfront and the lender will give you a line of credit up to that amount. A secured credit card can be a good way for anyone who struggles with managing money to build credit.
You should also consider what kind of rates you qualify for and what types of fees you can expect to pay, including annual fees, late fees and foreign transaction fees. Legally, credit card companies have to disclose these charges, so research these fees to make sure you’re getting the best card for your financial situation.
How To Build Credit Without a Credit Card
Using a credit card responsibly can be a great way to build your credit, but it’s not your only option. Here are some alternatives to consider.
Become an Authorized User
You might consider becoming an authorized user on someone else’s card. This means that you’ll receive access to another person’s line of credit. You can become an authorized user without a credit check, and you’ll receive credit for any payments made on the account. However, if the main credit holder stops making their payments, it could also hurt your credit.
Apply for a Credit-Builder Loan
When you take out a credit-builder loan, the lender will place the full loan amount into a separate account. You’ll then make payments every month until you reach the full balance of the loan. Once the loan is paid, you’ll receive the money back. This is a great way to build credit without spending any extra money.
Apply for an Installment Loan
An installment loan, such as a personal loan, student loan or auto loan, can help you build credit — as long as the lender reports your payment history to the credit reporting agencies.
Ask for Rental History To Be Reported
While home or apartment rental history is not typically reported to credit bureaus, Experian (one of the three major credit bureaus) does allow it. If you have always made your rent payments on time, ask your landlord to report it to Experian, so it can help you build your credit score.