I generally advise people to avoid credit cards. The reason is simple. For many people — especially young people — credit cards present a barrier against saving and investing for the future.

Yet, I have three credit cards, including some with annual fees. Am I a hypocrite then? No, because credit cards can certainly be useful in the right circumstances. We want to derive potential benefits from credit cards without abusing them.

I will explain the reasoning behind my credit cards below, but first let’s review the pros and cons.

By the Numbers

According to MoneyGeek.com, there were 537 million credit card accounts in the U.S in Q1 2022, representing an increase of 6% from Q1 2021. The total credit card debt in the U.S was $841 billion in Q1 2022, up $71 billion from Q1 2021, with the average cardholder carrying $5,769 in debt.

Individuals aged 75 or older had the most debt with $8,100, while those under 35 had the least with $3,700. Alaska had the highest average credit card debt at $6,617 per person, and Iowa had the lowest at $4,289. Americans in the 60th to 79.9th annual income percentile were most likely to carry debt, with approximately 57% of individuals in this income bracket having credit card debt.

Now, consider that the average interest rate on credit cards is around 15% — and is often even higher than that — and you can see that many Americans are paying thousands of dollars in interest each year. That’s money that could go toward growing wealth.

The Benefits of Credit Cards

There’s no question that credit cards offer a number of benefits. They are widely accepted, making them a convenient payment method for both online and in-person transactions.

Further, many credit cards offer rewards and cash back programs that incentivize cardholders to use their cards. These rewards can include points, miles, cash back, or discounts on purchases.

Responsible credit card use can help individuals build a positive credit history, which is important for securing loans, mortgages, and other financial products in the future.

In an emergency, credit cards can provide a source of funds in case of unexpected expenses.

Credit cards offer fraud protection and consumer rights that can protect cardholders from unauthorized charges, as well as the ability to dispute charges and receive refunds for faulty or damaged products.

The Downside of Credit Cards

This single biggest problem is that credit cards often come with high-interest rates, which can make it difficult for individuals to pay off their balances and can lead to costly debt over time.

Credit cards may come with a range of fees, including annual fees, late payment fees, cash advance fees, and balance transfer fees, among others.

The convenience of credit cards and the availability of credit can lead to overspending and impulse buying, which can quickly lead to unmanageable debt.

Late payments, high credit card balances, and carrying a large amount of credit card debt can damage an individual’s credit score, making it more difficult to secure loans, mortgages, or other financial products in the future.

Credit cards can also be vulnerable to fraud and identity theft, which can lead to unauthorized charges and damage to credit scores.

Seven Strategies for Responsible Credit Card Use

1. To avoid interest charges and late fees, it’s important to pay credit card balances in full and on time every month. This can also help maintain a good credit score.
2. It’s important to keep track of credit card balances and not spend beyond what can be paid off each month.
3. Look for credit cards with low-interest rates, no annual fees, and cashback or rewards programs that fit personal spending habits.
4. Set a budget for credit card spending to avoid overspending and unnecessary debt.
5. Limit credit card use to planned purchases and emergencies to avoid impulse spending.
6. Avoid cash advances, which can come with high fees and interest rates.
7. Check credit reports regularly. Monitoring credit reports can help detect and correct any errors or unauthorized charges.

By following these strategies, individuals can use credit cards responsibly, maintain good credit scores, and avoid unnecessary debt.

My Credit Cards

Each credit card I have comes with a benefit. For me, there’s no other reason to have a credit card. (Note that I am not receiving any benefits for mentioning these specific cards). I use my credit cards like a convenient check, never spending money I don’t have, and always paying the balance in full each month. There are never any interest charges.

I have a Fidelity credit card that pays 2% cash back on every purchase. That money goes directly into my Fidelity brokerage account. There have been times that I have been able to use the card to pay major expenses. As long as the company I am paying doesn’t charge a 3% convenience fee, the Fidelity card is almost always my card of choice for purchases.

In addition, I have two separate airline credit cards. Each of these charges a fee of $95 a year. The only reason I have these cards is that when you book airfare on the airline associated with each card, checked bags are free. With nearly every airline charging fees for checked baggage, it doesn’t take long for these cards to pay for themselves. Further, if you use the card to charge airfare, then you earn additional frequent flyer mileage for your flight.

Typically, I avoid needing a cash advance, but for these I only use my bank’s debit card. Sometimes you get hit with various fees depending on where you are pulling money out, but you avoid the high interest fees of a credit card as long as you are simply withdrawing your own money. In addition, if you are pulling money out in a foreign country, having a debit card associated with a major bank usually ensures that you will get a good exchange rate on your currency.

Final Thoughts

While credit cards can be a useful tool for making purchases and earning rewards, they can also lead to unmanageable debt and financial trouble if not used responsibly. It’s important for individuals to carefully consider their financial goals and spending habits before applying for a credit card and to develop a plan for responsible use.

By following strategies such as paying balances in full each month, keeping track of spending, and avoiding cash advances, individuals can use credit cards to their advantage and avoid the downsides. As with any financial decision, it’s important to weigh the pros and cons and make an informed choice that aligns with your personal financial goals.

If you do, then you should free up money that can be invested to grow your long-term wealth.

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