Credit Card Basics

Credit cards can both help and harm your finances. On one hand, they allow you to build your credit history so you can qualify for larger loans with better terms (think auto loans and mortgages). Plus, many credit cards come with reward programs. On the other, credit cards can charge fees and exorbitant amounts of interest if you fall behind on payments, making them financially dangerous if you’re fiscally irresponsible.

Before getting your first credit card, it’s important to know what you’re getting into, so you can maximize the benefits and minimize the risks.

Key Takeaways

• Credit cards can help your credit or harm it, depending on how you manage spending and payments.
• Not all credit cards are created equal. Comparing terms, fees, and rewards before applying can save you money and frustration.
• A secured credit card can be a smart way to establish credit for the first time or rebuild it from the ground up.

Credit Card Benefits

A credit card gives you access to a revolving credit line, which lets you borrow money up to a certain credit limit. This is typically a significantly more convenient option compared to cash and other payment methods. Here are some other benefits of opening a credit card:

• Build credit: If you don’t have a credit history or your credit is poor, opening a credit card can be a great way to build (or rebuild) it. The issuing bank will report your timely payments to the three major credit bureaus each month. The longer you keep up with payments, the higher your credit score will climb (up to the maximum of 850).
• Rewards and sign-up bonuses: Many credit cards come with reward programs. For example, Wells Fargo’s Active Cash Credit Card lets you earn 2% in cash on purchases. Other cards offer airline miles, discounts for certain spending categories, and/or one-time sign-on bonuses.
• Cover emergency expenses: Credit cards can be an effective safety net for emergencies. If you don’t have sufficient cash on hand, they can help cover medical bills, car repairs, and other unexpected expenses while you gather the necessary funds to pay off the debt.

Important

Any unauthorized charges to your credit card typically aren’t your responsibility. Under the Fair Credit Billing Act (FCBA), your liability is limited to $50, and many credit card companies go further by offering zero liability policies. This means if your card is stolen or otherwise misused, you won’t lose any money.

Credit Card Risks

All that being said, using a credit card also has some potential risks. For one, having constant access to credit in your pocket makes it easier to overspend, which can cascade into further problems if you let it get out of hand. Below are a few additional risks to keep in mind:

• High interest rates: Most credit cards are unsecured, meaning they’re not backed by any collateral. As a result, issuing banks tend to charge higher interest rates on outstanding balances. In March 2025, the average credit card annual percentage rate (APR) was 24.20%. That means if you held a $1,000 balance for a year, you’d also owe about $242 in interest.
• Fees: On top of interest, many credit cards charge annual, late payment, foreign transaction, and other fees. These can add up fast, putting a real cost on having and using a credit card.
• Damage your credit: Just as responsible credit card use can build your credit, irresponsible use can hurt it. If you fall behind on payments or stop making them altogether, you can significantly damage your credit, hurting your ability to take out future loans.

How to Avoid Credit-Card Pitfalls

Don’t let the risks scare you from opening your first credit card. So long as you pay off your balance every month, you won’t be charged any interest, and you can earn rewards and improve your credit along the way. The key is to spend responsibly and avoid common traps.

0% Introductory APRs

Some credit cards offer introductory periods, during which you’re charged no interest. Depending on the lender, these can last anywhere from a few months to 21 months. This can be a great way to consolidate higher-interest debt with a balance transfer. However, when the introductory period ends and the regular rate starts, you could end up with a high APR being levied on a large balance.

Cash Advances

Cash advances can be another trap for unsuspecting spenders. Essentially, they’re short-term loans taken against your card’s line of credit. You simply use your card to withdraw cash from an ATM. While this might seem like a quick and convenient way to get cash, the costs can add up fast.

Unlike regular credit card purchases, cash advances start accruing interest immediately—there’s no grace period. Furthermore, the APR on cash advances is often higher than your regular purchase rate, and most credit cards charge a 3%–5% cash advance fee.

How to Find the Best Credit Cards

It can be tempting to sign up for the first credit card offer you receive, especially if it includes an attractive sign-on bonus or a 0% introductory APR. However, you may come to regret it. Some lenders with steep terms have historically targeted young or inexperienced consumers who may not know better (though thanks to the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act, such marketing practices are restricted).

To get the best credit card for your financial situation, shop around. Review and compare annual fees, interest rates, late payment penalties, reward programs, and other credit card terms.  Don’t forget to also check whether the credit card will be accepted where you intend to shop. For example, Discover cards aren’t accepted in many foreign countries.

Finally, always read the fine print. Some credit cards may advertise attractive terms but not the restrictions. For instance, rewards may be capped or limited to certain spending categories, or balance transfers may need to be completed by a specific deadline to qualify for the introductory APR.

A Safe Option for Building Credit

Let’s say you want to open a credit card to build your credit history, but your score is too low to qualify. One option you have is to get a secured credit card. It works just like an unsecured credit card, except you put down a refundable security deposit that serves as your credit limit. Because this protects the lender in the event you stop making payments, you’re more likely to qualify despite your poor credit. Additionally, the lender will still report your on-time payments to the major credit bureaus, helping boost your score over time.

The Bottom Line

Ultimately, credit cards can be valuable tools for building credit, earning rewards, and handling emergencies—but only if used wisely. To avoid the potential dangers of high interest, fees, and credit score damage, carefully review the terms, spend within your means, and pay your balance in full each month.