As consumers look for ways to manage their spending amid inflation, credit cards have gotten a bad rap because of high interest rates. However, with rates dropping, the tide may be changing.
"With the Fed likely to steadily lower rates, now is a good time to reexamine the benefits of a credit card to help you unlock its full potential," said Michael Lane, senior consumer product manager at BOK Financial®.
Credit cards are more than just a convenient payment method; they offer a range of benefits that can help manage your finances, protect your purchases and even put money back in your pocket, he pointed out.
1. Cashback rewards
One of the most appealing benefits of using a credit card is the ability to earn rewards or cashback on your purchases. Lane says some of the most popular cards are cashback cards with a good interest rate that give you a percentage of your spending back as cash.
"This is often credited to your account as a statement credit that you can use to make a payment. You can also have the money transferred to your bank account," he explained.
Some cards offer cashback on all purchases, while others provide higher rates of cashback in specific categories, such as dining, groceries, gas or streaming services, making it easy to maximize your rewards in areas where you spend the most.
2. Build and maintain good credit
Using a credit card responsibly is a great way to build and maintain a strong credit history. Building a good credit score can lead to better financial opportunities, such as lower interest rates on loans and higher credit limits, Lane said.
If you're just starting out on your credit-building journey, Lane suggested using a secured credit card. By using your card regularly and paying off your balance in full each month, you demonstrate to lenders that you can manage credit responsibly.
Lane said he's seen many clients who need to improve their score responsibly use a credit card to do so—sometimes by over 100 points.
"A key factor in your credit score is your credit history. In other words, how long the line of credit has been open," said Lane.
"Credit agencies also consider credit utilization and timely payments. By making payments on time and keeping your balance low relative to your credit limit, ideally below 33%, you can boost your score over time."- Michael Lane, senior consumer product manager at BOK Financial
However, opening too many cards in a short time frame or closing cards that have been active for a long time can hurt your credit score, he cautioned.
3. Fraud protection
Lane personally uses a credit card, not a debit card, for all online and in-app purchases to protect himself.
Credit cards offer a level of security that cash and debit cards cannot match. If your credit card is used fraudulently, you likely won't be held responsible for unauthorized charges. Plus, since there is a delay between when a charge is made and when you're billed, you have time to address any suspicious charges before you must make a payment. This differs from a debit card, which draws immediately from your bank account, he explained.
Even with these protections in place, you should still be on the lookout for fraud and scams by:
- Monitoring your accounts carefully.
- Signing up for fraud alerts from your card provider.
- Staying informed about the latest phishing and smishing (aka text) scams.
- Avoiding unsecure and sketchy websites.
4. Access to emergency funds
Ideally you should have three-to-six months' worth of emergency funds available, but a credit card can be a backup, if needed. Credit cards give you immediate purchasing power. Whether it's a car repair, medical bill or loss of income, a credit card can help you if your emergency fund isn't enough to cover expenses until your next paycheck. However, it's important to remember that a credit card should not be your primary emergency fund, Lane cautioned. Instead, you should build up a cash reserve for emergencies and only use your credit card as a last resort.
5. Travel benefits
Some cards are specifically designed to reduce your travel expenses and enhance your experience while on vacation. Many credit cards offer points or miles that can be redeemed for flights, hotels or car rentals. Some cards are co-branded with airlines or hotel chains and offer additional perks like free checked bags, priority boarding or room upgrades. These rewards can add up, possibly to the point that you can take entire vacations using a card's travel rewards.
Travel-specific cards may also come with a travel insurance benefit like trip cancellation, lost luggage reimbursement or travel accident insurance.
To make the most of travel benefits, Lane recommended choosing a card with perks that match your travel habits and carefully reviewing the terms and conditions of any rewards or insurance coverage.
6. Promotional offers
One of the advantages of a credit card is the initial promotional low or 0% interest annual percentage rate (APR) on purchases or balance transfers. According to Lane, these promotional offers can be a great option if you're looking to:
- Consolidate debt.
- Finance a large purchase.
- Pay down existing debt without paying more in interest.
You just need to make sure you pay off the balance before the promotional period ends, he cautioned. To avoid interest charges, always pay your balance in full during the grace period and be cautious of making new purchases if you're not confident you can pay off the balance in time.
7. Grace periods
Many credit cards offer a grace period, typically 21 days, during which you can pay off your balance without incurring interest. By paying your balance in full each month, you can essentially use your credit card as an interest-free loan for a few weeks.
Other tips for using credit cards responsibly
Credit cards are tools, and like any tool, they must be used properly, Lane noted. Ideally, you should pay your balance in full each month to avoid paying interest. If you can't pay the full balance, try to at least stay below a 33% utilization rate on each card, so as not to hurt your credit score.
You also should set a budget and use your card to pay for things for which you've already budgeted. This will help you avoid overspending and accumulating debt.
Finally, monitor your spending. Regularly review your statements and set up alerts for large purchases or low balances to help you stay on top of your spending and catch any potential issues early.
Applying for a credit card doesn't have to be intimidating—with the right approach, you can take full advantage of credit card benefits while minimizing risks.
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