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Credit cards sometimes get a bad rap. Seen as a “debt provoker,” they’re not often associated with building wealth. And yet, while they come with risks, credit cards offer immense benefits that can bolster your finances in a big way.
If you don’t currently own a credit card, here are five ways they could strengthen your finances.
Hands down, credit cards can be one of the most effective ways to build and strengthen your credit score. As you pay your credit card balance in full and on time each month, you show lenders and credit bureaus that you’re capable of handling credit. This reflects well in your score, especially if you establish a long history of on-time payments.
That said, when you open a credit card account, your credit score might experience a brief drop. That’s because credit card companies run a hard inquiry on your credit report. These inquiries stay on your credit for two years and can cause a small dip in your credit score, usually no more than five to 10 points. The effect is temporary, and you’ll likely see your score rise again with good credit activities.
Many credit cards earn cash back, points, or miles on your everyday purchases. These rewards can be redeemed in ways that help you save money, such as getting a statement credit, depositing cash back into a bank account, or using miles toward flights.
It’s important to compare the earn rates on credit cards before applying and pick those that align with your spending. For instance, if most of your monthly spending goes toward groceries, getting a cash back card that earns 3% to 5% at supermarkets and grocery stores might be the best choice for you. Likewise, if you spend money more or less equally across numerous categories, you might be better off with a cash back card that earns a flat rate on all spending (2% is a good rate to look for).
Credit cards often come with free shopping and travel insurance. The insurance is built into the card; all you need is use the credit card to make purchases and the coverage will automatically apply.
For example, many cards have rental car insurance that can cover the cost if your rental is damaged or stolen. Other cards have purchase protection, which will cover new purchases against damage or theft for a certain period. At the very least, nearly all cards have 0% fraud liability, protecting your finances against unauthorized transactions.
Credit cards are accepted nearly everywhere — both locally and abroad. Since several store chains are now going cashless, having a credit card gives you a payment method that is nearly universal. This can also help you while you’re traveling in different countries, as you won’t have to worry about local exchange rates or having enough currency to cover purchases.
Welcome bonuses are a favorite perk of many. Many credit card companies will offer you a one-time bonus when you spend a certain amount in a specific timeframe. For example, a credit card might offer you a $200 cash back bonus when you spend $500 in three months. This gives you a rare chance to amass an enormous amount of points, miles, or cash back in a short period, giving you a huge boost upfront.
Granted, even with welcome bonuses and rewards, credit cards come with risks, like high interest rates. They could tempt you to spend money you don’t have, thereby damaging your credit if you carry a high balance and potentially trapping you in a cycle of debt.
But if you can align your credit card use with your cash flow — spending only what you have and paying off your balances frequently — the benefits will remain benefits, and you’ll get the utmost value out of your card. By treating your credit card as a financial tool, you can take advantage of its perks without compromising your financial security.
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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.
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