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Credit Card Basics

Pros and Cons of Credit Cards

Bev O'Shea
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Quick Answer

Credit cards offer convenience, consumer protections and in some cases rewards or special financing. But they may also tempt you to overspend, charge variable interest rates that are typically higher than you’d pay with a loan, and often have late fees or penalty interest rates.

<p> FICO Scores are used by 90% of top lenders, but even so, there’s no single credit score or scoring system that’s most important.</p><p></p><p> In a very real way, the score that matters most is the one used by the lender willing to offer you the best lending terms. That, in turn, may depend on the type of loan or credit you need, your credit history and the lenders you seek out.</p><section id=

Why There Isn’t a Single, Most Important Credit Score

There are several reasons why there isn’t one credit score on which consumers should place their sole focus.

No Score Is Universal

No single credit score can be considered most important because it's practically impossible to know exactly which score any given lender will see when they process your credit application. Lenders have considerable choice among commercial credit scoring systems, or scoring models, including at least 16 different versions of the FICO Score and four versions of the rival VantageScore®.

The Same Number Can Mean Different Things

The most common scoring models, VantageScore 3.0 and 4.0 and the general-use versions of the FICO Score, assign three-digit scores on a range of 300 to 850, with higher scores indicating greater creditworthiness. Even when they share the same scale, however, it’s important to know that a specific score can mean something different depending on the scoring model, and even which version of that model, is used to generate it.

A “Good” Score Depends on the Lender

Lenders typically select one or more scoring models after testing its effectiveness with their loan offerings and target customers. While one lender might fine-tune its scoring methods to identify the most creditworthy of borrowers, another might focus on riskier borrowers, and use scoring to better understand them. Some lenders even feed scores from the FICO Score or VantageScore models into their own custom-built scoring models to better understand potential customers.

Scores Can Vary by Data Source

Commercial scoring models generate scores using credit report data from one of the national credit bureaus (Experian, TransUnion or Equifax). Because your credit reports at all three bureaus are rarely identical, it’s virtually impossible to predict what score a lender will receive or use when deciding if you qualify for a loan, or when deciding what interest rate and fees to charge you. Recognizing this, many lenders use scores generated from two or even all three bureaus when performing credit checks.

Most Important Credit Scores by Role

The variety of credit score models and versions available today can make it tough to predict which score any lender will use, but different models and versions are more popular than others for specific lending applications. Here’s a list of the scores you’re likeliest to encounter in various settings.

Most Important Credit Score for Monitoring Your Credit

FICO Score 8. The FICO Score 8 is currently the most widely used version of the FICO Score. You can check it for free from Experian and other sources, so it’s easy to track. While there’s no guarantee the score you see when you check yourself will be identical to the one a given lender will see, FICO Score 8 will give you a good idea of how lenders will view your credit profile.

Most Important Credit Score for a Credit Card Application

FICO Bankcard Scores 8 and 9. The FICO Bankcard Score, which debuted in 1993, is fine-tuned for determining the creditworthiness of credit card borrowers. It uses a scale range of 250 to 900, and versions 8 and 9 of this score are widely used by credit card issuers. You can get your Bankcard Score through the three national credit bureaus and possibly your credit card company.

Most Important Credit Score for a Mortgage

FICO Scores 2, 4 and 5. Known as “classic” FICO Scores, these older versions of the generic FICO Score are widely used by mortgage lenders because they are included in criteria that make conforming mortgages eligible for purchase by the government-backed mortgage-funding corporations Fannie Mae and Freddie Mac. They use the traditional 300 to 850 score range.

  • FICO Score 2 is the “classic” FICO Score version available from Experian.
  • FICO Score 4 is the version of the classic FICO Score offered by TransUnion.
  • FICO Score 5 is the Equifax version of the “classic” FICO Score.

Most Important Credit Score for an Auto Loan

FICO Auto Score 8 and FICO Auto Score 9. Tailored for use by providers of auto financing, the FICO Auto Score uses a score range of 250 to 900. Versions 8 and 9 of the model are widely used by auto lenders, and available from all three national credit bureaus.

How to Improve Your Credit Score

While uncertainty about which score will apply to a credit application may seem nerve-wracking, the good news is that all scoring models tend to respond favorably to the same set of good credit management habits, including:

  • Pay your bills on time, especially all debt payments. Payment history accounts for about 35% of your FICO Score, making it the most influential factor in your scores.
  • Keep credit card balances low. Lenders see high credit card balances as an indicator of risk, so scoring models will lower scores if your total card balance exceeds about 30% of your total borrowing limit. That said, keeping balances under 10% of limits can help you achieve top scores. Credit utilization accounts for about 30% of your FICO Score.
  • Bide your time. Credit scoring models reward borrowers with long track records of responsible credit management. In other words, if you keep up with your payments and mind your balances, your credit scores will tend to improve over time. The ages of your open credit accounts, which serve as a measure of experience, are responsible for about 15% of your FICO Score.
  • Maintain a healthy credit blend. Scoring models tend to boost the scores of who can handle multiple types of debt at the same time. A mix of installment loans with fixed payments (student loans, mortgages, auto loans and the like) and revolving credit (accounts like credit cards that allow charging against a set borrowing limit) will tend to increase your score. Credit mix is responsible for about 10% of your FICO Score.
  • Seek new credit only as needed. The number of recently opened credit accounts in your credit report, and the number of hard inquiries reported by lenders when you apply for credit, account for 10% of your FICO Score. Lenders see too many new accounts or recent inquiries as indicators of increased risk, so they can hurt your credit scores.

The Bottom Line

While no single credit score can claim the title of “most important,” credit scores in general can be very important to your financial future. Taking steps to improve your credit, and marking your progress by tracking your credit score for free are great ways to prepare for home buying, seeking a car loan or otherwise using credit in pursuit of your dreams.

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Credit cards offer convenience, consumer protections and in some cases rewards or special financing, but they may also tempt you to overspend, triggering a debt cycle, and they come with interest rates that are generally higher than comparable fixed-rate loans.

Here are pros and cons of credit cards to consider if you're wondering whether opening one might be a good move.

Pros of Credit Cards

Managed responsibly, credit cards have plenty of advantages to offer cardholders.

Convenience

It's easy to pull out a credit card to buy what you want to, when you want to. It doesn't get much easier than buying online with a merchant or platform that already has your information stored. Whether in your hand or your digital wallet, credit cards make payment just about as easy as it can get.

That convenience also means you don't have to worry that there's not yet enough money in your checking account because you don't get paid for a few days.

Dividing a check? Most restaurants will happily split the check for you and you can put it on individual cards.

Consumer Protections

If you use a credit card to buy a product that turns out to be unsatisfactory, was falsely advertised or never arrives at all, you can dispute the charge with your credit card issuer. Many credit cards also offer zero liability when unauthorized purchases are made on your card, meaning you won't be responsible for paying the charge. Your money is not tied up while the matter is decided (you get a temporary credit).

Potentially Free Financing

Some credit cards offer 0% interest rates for an introductory period, giving you several months to over a year to pay off purchases without accruing interest. Some retailers offer "same as cash" deals in which you owe no interest if you pay off your balance within a certain time frame. (If you don't make the deadline, though, you could be on the hook for all the past interest.) If you are repaying high-interest debt, a reprieve from interest can save money.

Travel Perks and Reservations

Ever try to buy a plane ticket or reserve a hotel room without a credit card? It can be done, but not easily. And if you use a debit card, there may be a hold placed on the card for the entire amount, plus incidental charges, to make sure all is covered.

In addition, many travel credit cards include extras like concierge services, access to airport lounges and rental car insurance, and don't charge foreign transaction fees when you use the card outside the country. Some cards also include travel insurance or extended warranties.

Rewards

Whether it's cash back, a free award night in a hotel or airline points, you can score some significant savings with the right credit card. It's worth noting that some of the most generous rewards programs come from cards with an annual fee.

And, if you typically carry a balance, be aware that any rewards will not outweigh the interest rate of the card. These cards should be paid off every month to get their full value.

Easy Recordkeeping

Many cards allow you to search for transactions. This can be especially helpful at tax time or when making choices about insurance coverage.

Potential to Build Credit

Used responsibly, credit cards can help you build credit—and that is one thing cash and debit cards cannot do for you. It's important to remember that you do not need debt to build a good credit score: Paying your full balance by the due date each month will do just as much or more to help your credit than carrying a balance on your card. That said, missed or late payments and high balances can hurt on your scores.

Cons of Credit Cards

Credit cards also have their drawbacks, which mainly center on their financial risks.

Risk of Overspending

The ease and convenience of using a credit card is precisely why it's so easy and perhaps tempting to overspend.

Unlike a wallet that grows lighter as you spend, a credit card with a big limit may allow you to keep right on spending until you hit your credit limit—and that can lead you into a cycle of making only minimum payments as your debt grows. Maintaining high balances on your credit cards can also do serious damage to your credit scores.

Potential Debt

Because credit cards allow you to spend more than your budget will accommodate, you can end up paying significant interest while making little progress on repaying credit card debt.

The best practice is to use cards for convenience and to pay the balance in full every month. Not everyone can do that, but a high balance—unless you have special financing—usually means you'll pay more in interest and can suggest you owe more than you can comfortably repay.

Variable Interest Rates

Credit cards typically have variable interest rates, which rise or fall based partly on the federal funds rate. Particularly in an environment of rising interest rates, the cost of carrying a balance on a credit card can go up, and that can mean it's harder to budget. In the best case, variable interest doesn't matter because you're using it as a convenience or to earn rewards and paying off your balance each month. But if you carry a balance, finance charges can go up.

Fees

Paying late—even if it's not late enough to get reported to credit bureaus—can result in fees. Some credit cards also have annual fees or, in the case of some premium cards, fees for adding an authorized user. There may also be fees for cash advances. Some fees, such as annual fees, may be worth it if you're earning rewards that outweigh the fees. It's smart to familiarize yourself with fees and what triggers them. You may decide fees are worth it, but you might also look for ways to avoid them if you don't think you're getting value from them.

How to Use a Credit Card Responsibly

A credit card can be a useful tool when used responsibly. Like every tool, it works best in skillful hands. You can avoid some of the potential pitfalls of credit card by:

  • Setting up alerts so that you get a text or email when the card is used or the balance reaches a threshold you select
  • Using autopay for at least the minimum payment—or the entire balance if there is always enough in your bank account to cover it
  • Spending only what you can afford to pay back each month or making sure you finish paying a 0% introductory rate or "same as cash" deal well before the expiration date
  • Paying the monthly balance in full, particularly if it's a rewards card
  • Knowing your credit card interest rates, so that you can choose the lowest rate if you can't pay off the entire balance
  • Paying at least the minimum payment due, on time every time, because even a single late payment can badly damage credit

Alternatives to Credit Cards

It's hard to beat credit cards for convenience and perks, but if you're unsure about getting a new card, there are other options. If you need to finance something other than a car or a home, you could consider a personal loan or an installment loan geared toward buyers of a particular household item, such as furniture, appliances or mattresses.

Personal loans can also help you consolidate your credit card debt into a fixed-rate loan, often at a lower interest rate. That can be a smart financial move that saves on interest and potentially helps your credit score.

If you're considering a credit card because you're struggling to make ends meet, you could seek financial assistance, ask family or friends for a loan if you know you'll be able to pay it back, or look into an early payday app to help you get to your next paycheck (note these are not the same as payday loans, which should be avoided due to their high fees).

The Bottom Line

A credit card can be a great convenience, and rewards cards can help you stretch your travel dollars or offer cash back on purchases. They also offer consumer protections and some perks that cash does not.

But credit cards can tempt you to overspend and don't offer the same sort of feedback that an empty wallet or low bank balance does. It's easy to get yourself into serious debt, and fees plus higher interest rates can make it difficult to climb out.

Knowing yourself can help you decide if a credit card is the right choice for you. You don't need a card to build good credit, but a credit card can make your life easier, with perks and rewards you won't get if you rely solely on cash or debit cards.

If you believe a credit card is the right choice, Experian CreditMatch™ can help you sift through the possibilities to find one that is right for you and give you approval odds.

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