Pros and cons of credit cards

For many people, using credit cards for their everyday purchases has become part of their daily routine. They're convenient since you can just tap or swipe to complete your purchases or when you are using them online. That said, if you don't use credit cards responsibly, you could find yourself facing unwanted debt. Before you apply for a new credit card, make sure you understand the pros and cons of a credit card.

If you can always pay off your credit card bills on time and in full each month, you'll quickly reap the perks. Here are some of the pros of credit cards that you can enjoy.

Whenever you use credit cards, you start building your credit history. This is important because your credit score is one factor that is used by lenders to determine how creditworthy you are. Generally speaking, if you have good credit, you have a greater chance of being approved for credit such as a credit card or mortgage or auto financing from lenders in the future.

Using credit cards to pay for your everyday purchases is convenient since you don't need to carry cash. In addition, since with most credit cards, you get an interest-free grace period on your new purchases (if you pay your balance in full on time), you don't need to pay your bills right away. But remember to pay it on time every month.  

Almost every merchant accepts all types of credit cards these days, but despite that, it's not a bad idea to have two credit cards from different banks or payment networks in your wallet anyway, so you always have a backup.

Earning rewards on purchases is often one of the most exciting aspects of having a credit card. With travel credit cards, you can earn points when you make purchases that can be used later to offset some of your travel expenses. If you decide to go with cash back credit cards, you'll get a percentage of what you spend back as money back on your card. 

Most credit card issuing banks or other credit card companies offer different reward cards, so it's worth comparing cards before you apply.

While rewards are great, they aren't the only benefits that may come with credit cards. Many have other benefits such as travel insurance, airport lounge access, roadside assistance, mobile device insurance and extended warranties on purchases made with your card.

Regardless of your situation, there's likely a credit card designed for you. Students and new immigrants may be focused on cards that build good credit. If you're looking to reduce your debt, you could consider a credit card that has a low balance transfer rate. These cards allow you to transfer your existing balance on one higher interest rate card to a new one that has a lower interest rate. Travellers who want to minimize fees will likely be attracted to cards that don't charge an annual fee or may have no foreign transaction fees (even if the exchange rate still applies), like the Scotiabank Passport^TM Visa Infinite* Card.**

While it's easy to see the positives of credit cards, there's no denying that there are also some negatives to consider if you don’t use them wisely. Think about how the following credit card cons could affect you.

Credit cards are convenient, but you want to make sure you don’t overspend with them as a result of that convenience. This can happen when cardholders don't keep track of their purchases against their budget. If left unchecked, you might have a bigger bill than expected at the end of the month. Now, if you were to use cash, you might be less tempted to spend if you're watching your money physically leave your wallet or bank account. More importantly, when you use cash or your debit card, you're likely only using funds that you have available.

With credit cards, you're making purchases with borrowed money. If you're not careful about your spending, it's easy to get into debt and pay more in interest. To help prevent this, you will want to be mindful of your credit card’s interest rate. Trying to clear your debt when you're paying high interest rates can be difficult. While it's true that there's only a low minimum payment required each month, if you stick to that number, it could take longer to pay off your debt.

If you're not paying your credit bill in full and on time each month, you could negatively affect your credit score because your payment history is a significant factor in that score. If you're regularly missing payments or not making your payments on time (by your payment due date on your statement), your credit score could drop. In addition, how much credit you're using relative to how much total credit you have available could also affect your credit score. This is known as your credit utilization ratio. Experts recommend that your credit utilization ratio stays below 30%.^†

Beyond interest, credit cards often have fees to consider. Some credit cards have an annual fee, which could be several hundred dollars depending upon the benefits that are included with your card. Generally speaking, credit cards with no annual fee or a low annual fee come with fewer benefits, while cards with a higher annual fee give you more rewards. Additionally, some fees you may incur while using a credit card include those for cash advances, foreign transactions and balance transfers. Those types of fees can add up fast if you do not manage them wisely such as avoiding making cash advances (use another means of credit), find a card that doesn’t have a foreign currency conversion fee (even if it the exchange rate still applies) and look for low-rate balance transfer offers. 

If you use your credit cards responsibly, they can be an incredible tool that allows you to earn rewards on your everyday spending while managing your finances.  However, they do have their downsides if you   are overspending. If you're thinking about applying for a credit card, be sure to consider the pros and cons so you can choose the best card for you.