Main content
Course: Financial Literacy > Unit 3
Lesson 2: Credit cards- What is a credit card?
- Choosing a credit card: credit card types
- Choosing a credit card: what to look for
- Schumer boxes and the things you should know about your credit cards
- Understanding credit card terms
- Which credit card is better for you?
- Credit cards
- Credit cards: the good and the bad
© 2024 Khan AcademyTerms of usePrivacy PolicyCookie Notice
Credit cards: the good and the bad
Learn about the benefits and drawbacks of using credit cards.
What are the benefits of having a credit card?
Credit cards can be useful in many scenarios. Here are some of the benefits of using one.
Build credit
This is probably the biggest benefit of using a credit card. Using a credit card responsibly will help you build a strong credit score. A strong credit score will make it easier for you to get approved for loans, and qualify for lower interest rates. This will potentially save you thousands of dollars on big purchases like a car, or a home.
Rewards
Many credit cards offer rewards like cash back, travel points, or discounts on things you buy. These rewards can add up over time, and you can use them to save money or get free stuff. Certain stores also offer interest-free financing if using a store credit card, which means that you can make a purchase at the store, but pay it back over time without any extra costs.
Emergencies
A credit card can be helpful in an emergency. If you have an unexpected bill or a car repair, you can use your credit card to pay for it. Just make sure you pay it off as soon as possible so you don't end up paying a lot of interest.
Convenience
A credit card is convenient for everyday purchases. You don't have to carry around cash, and you can use it in a lot of places and online. If you don't have enough cash on hand to pay for something, you can put it on your credit card and pay it off later.
Purchase protection
Some credit cards offer purchase protection. This means that if you buy something with your credit card and it breaks or doesn't work, the credit card company might help you get your money back. This can give you some peace of mind when you're making a big purchase.
As you can see, there are many benefits to using a credit card. Just remember to use it responsibly and pay off your balance in full each month so you don't end up in debt.
What are some drawbacks of having a credit card?
Many people use credit cards on a regular basis, but they may not realize that there are some potential drawbacks to doing so. Here are a few things to keep in mind when it comes to using credit cards:
Interest
One of the biggest issues with credit cards is that they often come with high interest rates. If you don't pay off your balance in full each month, you could end up paying a lot more than you originally spent due to the interest charges.
Debt
Credit cards can make it easy to get into debt. It's tempting to use them to buy things you can't afford, and if you don't pay your bill on time, your debt can quickly snowball. Owing too much on your credit card, and not making your payments on time are two mistakes that will seriously damage your credit score. If your credit score plummets, it will be harder to get loans or credit in the future, and you will be paying a much higher interest rate.
Fees
Credit cards often come with a variety of fees, such as annual fees, late payment fees, or over-the-limit fees. These fees can add up over time, and they can be costly if you're not careful. Make sure to look over the Schumer box so that these fees do not come out as a surprise.
Overspending
Another problem with credit cards is that they can make it easy to overspend. It's a lot easier to swipe a card than it is to hand over cash, and you may not think twice about buying something you don't really need. Over time, this type of spending can really add up and hurt your budget.
Overall, credit cards can be a convenient way to make purchases, but they come with some potential risks. Make sure you use them responsibly to avoid getting into trouble.
Want to join the conversation?
would it be safer to use cash more than a credit card?(8 votes)
That might depend on how good you are at self-control. When you only use cash, you cannot spend more than you are carrying. However, when you only use cash, you do not leave a record of spending behind you that serves to help you grow a credit rating.
If you have good self control, it might be better to use a card, so long as you can manage to make your payments on time every month. That way you will develop the kind of "borrow and repay" record that helps you develop a credit score.(12 votes)
So what is the biggest difference between a credit card and a debit card? I don't know much about the latter, but they seem to have similar functions.(3 votes)
a debit is your money, a credit is the bank's money(21 votes)
- Would it be better to not own a credit card?(5 votes)
It depends on your ability and your opinion. If you are good at only spending as much as you need at that particular time, and you can pay bills when they are needed, then the credit card is right for you.
If you are somewhat in a risky financial situation, though, I wouldn't recommend one. It wouldn't help.
Now, there are some downsides to not having a credit card. You won't be able to build your credit score as easy.
These decisions are a matter of personal preference.
Hope this helps!(8 votes)
In Argentina, using credit cards is very beneficial, since having a high monthly inflation (almost 12%), the money will have less value in 1 month than at the current time (therefore you end up paying the products more "cheaper"). I understand that in the USA the use of these cards is a bit rejected, since it is associated with a constant debt only in exchange for a "good credit history"? Finally, I don't know if it exists in the USA, but in Argentina there is the possibility of paying for some products in fixed installments without interest (generally 3-6 installments), this can only be done with these cards (it helps a lot for inflation since in 6 months we have 50%).(8 votes)- what purchases should make using a credit card?(5 votes)
- Don't purchase anything that you can't pay off. Do purchase things that have lasting value, like appliances. Avoid spending more than a set amount (that you can easily pay off monthly) on things like chips, salsa and music downloads.(2 votes)
Is there a credit card for 9 year old kids(4 votes)- No. Most banks require a person to be 18 years old, a legal adult, to have a credit card.
If, at age 9, you want to have a credit card, have your parent get one with you on the account. Then you can use credit, but you won't develop a credit score from it, and if you use it poorly, you'll ruin your parent's credit score.(3 votes)
How does the credit card have so many fees(3 votes)- Dear Abbsex (Does Abb stand for abnormal?)
Credit cards are issued by banks, which are in business to make money for their stockholders.
A credit card makes money for the bank in several ways. When you purchase something from your local store with a credit card, and it costs $100, the bank only pays the store $95 or $96. That's one way the bank makes money.
If you don't pay the full $100 within 25 days, the bank charges you interest on the loan. That's the second way the bank makes money.
To consider you (take and process your application), the bank charges for the service. That's an application or membership fee. That's another way the bank makes money.
When you make your monthly payment late, the bank charges a "late fee". That's another way the bank makes money.
All of this piles up, and the bank pays dividends to its stockholders. That's how business works in a capitalist economy.(5 votes)
- How does the credit card have so many fees(3 votes)
- The credit card has so many fees because that's how the issuing bank makes money, by charging you to use its services.(3 votes)
- What's the best credit card companies?(2 votes)
The answer changes based on your needs.
If you are looking for a card that allows a better grace period and lower APR, you will need to do your own research to find those companies. If you travel more, look for a card with lower foreign transaction fees.
It's for you to research to find what card suits you.(5 votes)
- Is it true that if you go over the limits on a credit card they cut the card with scissors?(3 votes)
- There's no need for the bank that issued the card to cut it with scissors. But if you are overspending by using the card, a credit counselor, in the old days, might well cut your card into tiny pieces. Nowadays, when all you need to do to use the card online is to know the 16 digit number plus the 3 digit security code on the back, the scissors aren't of any value for trimming your ability to spend.(3 votes)