Why You Need a Credit Card (and You Do)

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October 23, 2022

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Credit cards have become an essential part of modern life. Forbes cites a study by the Federal Reserve Bank of San Francisco, which estimated that 28% of all payments were made using credit cards. According to the same Forbes piece, credit card users totaled 196 million at the end of the fourth quarter of 2021, a new high.

Many people use credit cards for different purposes. For example, some people use them to borrow money when they are short on cash. Others use them to make purchases when they don't have enough money in their bank account to cover the purchase. Although credit cards can be beneficial, they can also cause problems if they are not used properly.

There are a variety of reasons to get a credit card. So, if you need a credit card or just want to get one as a way to build credit, there are a few things you should know before you apply for one.

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Types of credit cards

Balance transfer cards

Balance transfer cards, as the name implies, allow you to move the balance from other cards or loans onto the balance transfer card and pay no interest for the first couple of months, after which you pay regular interest on the new balance. These cards are great for paying off high-interest debt without paying additional interest on the new balance.

Rewards credit cards

Rewards cards let you earn points that can be redeemed for rewards like gift cards or merchandise. Depending on the type of rewards program, you may also get cash back on your purchases or receive airline miles that you can redeem for flights and other travel-related expenses. Some credit card companies also offer special concierge services that give cardholders access to special deals on airfare, hotels, car rentals, and vacation packages. Some reward programs even offer perks like complimentary airport lounge access or first-row seats at concert venues.

Secured credit cards

Customers who have difficulty getting approved for other credit cards can usually qualify for a secured credit card by making a deposit equal to their credit limit with the bank, which is then held as collateral until the cardholder pays off their balance in full. Because secured cards typically require a security deposit or collateral, they tend to have higher credit limits than unsecured cards.

Prepaid cards

This type of credit card cannot be used to make purchases but has no credit line. Instead, customers load the card with a specified amount of funds and use it to make purchases until the money on the card has been spent. Customers are responsible for tracking how much money is loaded onto the card and must reload it when needed.

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Why you need a credit card

Cheap borrowing: Credit cards often come with interest-free periods. This allows you to avoid paying interest on new purchases for up to six months. You can therefore borrow large sums of money without paying any interest at all.
Build credit: Credit cards are a great way to build your credit history. If you always pay your credit card balance on time and keep your credit utilization ratio under 30%, credit cards can help build up your credit score. Having good credit can help you get lower interest rates on mortgages and car loans.
Free insurance: If you ever have a theft or damage while traveling, credit card issuers often offer to reimburse you for the loss up to a certain amount. Note that there are different insurance plans and that most will require you to pay an extra premium for your coverage.
Premium perks: Card companies often offer various additional services to their customers, such as access to exclusive events, discounts on hotel rooms, and special privileges when using certain businesses.
Reward programs: Cards with reward programs are popular. Reward programs let you earn points based on the amount you spend on the card. You can redeem these points for gift cards or other merchandise. However, it is important to choose a card that does not have high interest rates so that you don't end up paying more in interest than you earn in rewards.
Cash back: Many credit cards offer a cash-back option. When you use the card for qualifying purchases, you get cash back on a percentage of your purchases. Some cards offer high cashback rates, while others offer lower rates. Choosing the right card will depend on your purchases and how large those purchases are.

Things to know before applying for a new credit card

Although credit cards can be beneficial, they can also cause problems if they are not used properly.

Annual fees: Some cards carry annual fees. These fees can eat up some of the rewards you earn from using your card, so it’s generally a good idea to opt for a card with no annual fee.
High interest rates: If you’re unable to pay off your balance every month, you could end up paying high interest charges that can end up costing you more than you had originally planned to spend.
Credit card debt : It's easy to overspend with a credit card because it allows you to make large purchases that you don't have to pay off immediately. But this is where the trouble begins, and you may get into debt if you don’t manage your spending habits responsibly. The best way to avoid this situation is to use your credit card like a debit card, and avoid making minimum payments.
Read the fine print: Credit card companies may make big claims - no annual fee, low cashback threshold. To truly understand each offer, you must dig deeper into the agreement's fine print.
It can ruin your credit: While credit cards are a great way to build your credit, they can also lower your FICO score if you don't make payments on time. This information is relayed to the major credit bureaus, and every time a potential creditor runs a credit check and pulls your credit report, they'll know you're not good with money.

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Best credit cards of 2022

Citi

Among Citi's many credit cards, two offerings by the credit card company stand out:

Citi Double Cash Card: This card combines cashback and balance transfer capabilities! Best for flat-rate cash back, the card boasts 0% APR on balance transfers for the first 18 months, and it doesn't have an annual fee either. With regards to cashback, you earn 2% on each purchase. But if you use this card for a balance transfer, you'll be on the hook for interest on purchases unless you pay off the balance in full each month.
Citi Diamond Preferred Card: The card offers 0% APR on purchases for 12 months and balance transfers for 21 months. In addition, you don't have to worry about any annual or late fees. However, the card doesn't have any rewards or incentives. In addition, you'll have to pay a balance transfer fee of $5 or 5% of the amount of each transfer, whichever is higher.

Discover

The Discover it Cash Back card lets you earn 5% cashback from select retailers, gas stations, and grocery stores. Discover will also double your cash back rewards during the introductory year, and the card doesn't come with any annual fees. But this card has multiple cash back rates, which muddy the waters a bit because you can't estimate your cash back rewards by yourself. Another downside: the credit card doesn't offer any travel rewards, so if you're traveling abroad, it's best to look elsewhere.

Chase

Chase is the largest issuer of credit cards in the U.S., so we have chosen four of its best cards.

Chase Sapphire Reserve: Targeted at luxury travelers, this card offers travel rewards points, $300 in travel credits each year, and priority lounge passes. And if you spend $4,000 in your first three months, you'll get 60,000 bonus points. However, at $550, the annual fee is on the high side, and the card doesn't have any introductory APR either.
Chase Sapphire Preferred: This one's another travel rewards card with no foreign transaction fees, trip cancellation, and trip interruption insurance. You'll earn 60,000 bonus points if you spend $4,000 in the first three months of opening the card. But the $95 annual fee and no access to luxury travel deals may be a deal breaker for some.
Chase Freedom Unlimited: Unlike the previous two Chase cards, Chase Freedom Unlimited doesn't charge you an annual fee. It also comes with 0% APR for 15 months, which applies to purchases and balance transfers, and you get 5% cash back at grocery stores. But there's a 3% foreign transaction fee.
Chase Ink Business Unlimited: This is focused on business owners who can swipe the card to earn 1.5% unlimited cash back. The card also features no annual fee. If you spend $7,500 in the first three months, your cashback will reach $750. But the card doesn't come with an intro balance transfer offer, and Chase will charge you a 3% foreign transaction fee.

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The bottom line

Choosing a credit card can be a difficult process because there are a lot of things to consider – are you looking for cash back credit cards, or perhaps you intend to use the line of credit as a cash advance? Choosing the right type of credit card depends on your situation and preferences. Different cards serve different purposes and have varying fees, so it’s important to consider your needs. However, some of the services offered by a credit card issuer may come at an additional cost, so you should read and understand the terms and conditions before signing the agreement.

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Jasir Jawaid is Joy Wallet's Assistant Editor. He has more than 13 years of experience as a journalist covering Wall Street, equities, financial policy and regulation, and cryptocurrency and blockchain.

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