In very simple terms, credit cards are a way to borrow money for goods or services that an individual or business might need. Like any other form of debt, if you spread out payments over the course of time, there will be interest charges that will add to the cost of the original purchases. And unlike mortgages, auto or business equipment loans, obtaining a credit card doesn’t require that the applicant pledge collateral. The ability to secure a credit line is based on the credit score of the individual or business applicant. For these reasons, credit card debt is referred to as “unsecured” debt.

Let’s take a look at how credit cards work and weigh some of the advantages and disadvantages of owning them.

Credit card interest rates and fees

When you sift through the myriad of credit card options on the market, you’ll see differing APRs affixed to different cards. For example, the Citi® Double Cash Card (a NextAdvisor advertiser) charges rates ranging from 15.49% - 25.49% (Variable) on purchases, while the Chase Sapphire Preferred® Card charges rates ranging from 17.49% - 24.49% Variable on purchases.

If you manage your credit card use wisely, it doesn’t really matter what APR your card has. By paying off balances each month, interest rates won’t apply due to the grace period offered by the various issuers. This means that interest won’t accrue on a purchase you make on June 15, for instance, and pay off by the due date of July 1. APRs only kick in when you make a purchase that won’t be completely paid off by the following due date.

Let’s take a look at an example. Assume you purchase a laptop computer on June 15 for $1,000, but you expect to have the cash flow to pay it off in 6 months. In a scenario with a 24.99% APR, you’d pay $179.02 a month for 6 months, and the corresponding interest charges would be $74.14 in total.

Of course, APRs aren’t the only fees you need to think about — there are also annual fees to consider. Annual fees can range from $0 for a card like Discover it® Cash Back to $550 for a premium card like The Platinum Card® from American Express (a NextAdvisor advertiser). And as with other products or services, it’s true that you get what you pay for with credit cards. While both cards with and without annual fees can offer rewards such as pointsmiles or cash back, the real difference often lies in the added perks and benefits you’d get by forking over a hefty annual fee. For example, The Platinum Card from American Express gives you complimentary access to airport lounges, and fees for checked bags may be waived, so frequently taking advantage of these programs would justify the high cost of the program.

If you walk away with one impression, it’s that there’s a bevy of choices when it comes to credit cards in general. The next step would be finding rate and fee structures that meet your needs.

Pros of using credit cards

  • Intro offers. We gave you a briefing on APRs in our credit card 101 overview above, and there are a couple of situations where you can take advantage of zero-interest financing. Many cards offer no interest on purchases for a number of months after you first acquire them.
  • Balance transfers. Here’s a second scenario in which you can move a balance from a high-interest card to one that grants you interest-free financing for several months — perhaps 12 to 21 months depending on the issuer.
  • Rewards. For every dollar you spend, rewards cards give you a few extra incentives for making purchases. The program might involve points you can redeem for airfare or cash back that can be converted to a gift card.
  • Purchase protection. Warranties on products purchased with many cards can be extended beyond the original manufacturer’s promise, depending on your credit card.
  • Credit monitoring and alerts. For credit rebuilders, some cards offer free access to FICO scores so progress can be monitored. Users receive alerts if any new activity credit-related activity is reported.
  • Global purchasing power. Merchants all around the world accept cards from major issuers, so there’s less of a need to carry large amounts of cash on trips abroad.
  • Fraud protection. Credit cards are one of the safest ways to make purchases because they come with more federal fraud protections than debit cards or cash.

Cons of using cards

  • Unsuitable annual fees. You might secure a credit card for emergency purposes that comes with a $95 annual fee. If you don’t use the card, you’re effectively losing that money. That’s why it’s essential to know your spending habits and understand a card’s terms before you apply for a card.
  • And more fees. They may not jump out at you when you’re shopping for a credit card, but you could incur additional fees to transfer a balance, make a purchase in another country or perform a cash advance. Although these fees won’t always break the bank (and some cards don’t charge these fees), you’ll want to make sure you’re aware of how much such transactions will cost you.
  • Carrying a balance. If you bought that thousand-dollar laptop and paid only the minimum amount required each month by the issuer, that item would cost you about 17% more, as explained in our example above.
  • Late payments. Not paying on time could raise your APR, and more importantly, repeated late payments will significantly lower your credit score. When your credit score is low, you’ll have less opportunity when it comes to taking out a loan or opening up a new line of credit. As such, you should make sure your credit card payments are always on time.
  • Temptation. You might be persuaded to purchase stuff that you really don’t need. What’s worse, you might not be able to afford the ensuing payments, and that will lead to cash flow problems. That’s why you should try to only use your card for purchases that you know you can afford — meaning you can account for the cash to pay them off.
  • Maxing out. Spending up to the card’s credit limit and only paying the minimum required amount will stretch out payments, trigger interest charges and negatively impact your credit utilization ratio, which lowers your credit score in turn.

How to apply for a credit card

You might receive credit card offers in the mail, but the easiest and fastest way to apply is online. You’ll need some basic personal and financial information, and the whole application process only takes a few minutes. You should anticipate that the issuer will check your credit and if all goes well, you may have a decision in a few minutes or less.

Disclaimer: This content is not provided or commissioned by the credit card issuer. Opinions expressed here are author’s alone, not those of the credit card issuer, and have not been reviewed, approved or otherwise endorsed by the credit card issuer. This content was accurate at the time of this post, but card terms and conditions may change at any time. This site may be compensated through the credit card issuer Affiliate Program.