A credit card comes with a predefined credit limit using which you can make purchases. After every billing cycle (of usually a month), your credit card bill is generated. You are required to pay the total amount due in order to avoid additional charges. However, if you miss the payment or pay only the minimum amount due, then you will incur credit card interest rates and other penal charges. So, as long as you keep making regular payment of your credit card bills, you will be able to make the most of its benefits.
Advantages of Credit Cards
The choice to pay later – Credit card allows you to pay off a purchase at a later date. Typically you get up to 50 days of interest-free period. During this time you do not incur interest on any purchase that you made. So, if you time your purchase correctly you can pay off a purchase after receiving your monthly salary, you can ease the burden on your monthly budget.
Transaction Dispute – Credit cards allow customers to dispute a transaction that they have already made. This feature is particularly useful if you have paid for a service that was then not given to you or a product that was not delivered. Moreover, it is a much quicker way of getting your money back.
Security – Today Credit cards are secured with EMV (Europay, MasterCard, and Visa) chip which secures your card against fraudulent transactions. Banks and payment gateway providers have also boosted their security measures to ensure safety during online transactions.
Besides this, the Reserve Bank of India has mandated that the burden of proof for customer liability in case of unauthorised electronic banking transactions lie with the bank. Thus, you do not have to worry about proving your innocence in case you suffer from a fraudulent online transaction.
Credit Score – Money lenders gauge an applicant’s ability to repay a loan on the basis of their credit score. The score takes into account how much credit you have taken till date, what are your repayment habits and how long have you taken a loan for. A higher score lets the bank know that you can be trusted to repay a loan while a lower score dictates the opposite. Proper usage of credit cards can be really useful in this regard.
Loan on Credit Card – If you ever require cash urgently then you may apply for loan against credit card. Here, the bank will transfer money against your available cash/credit limit to your bank account. Post approval, you can expect to get the amount transferred within a few minutes.
Balance Transfer – Credit cards let you transfer the outstanding amount from your credit card to another card provider’s credit card. By using this facility you can lower or even temporarily avail a zero interest rate. This will give you a much needed respite from the high credit card interest rate which is about 40%.
Rewards and Benefits – Almost all credit cards provide some form of benefit to their cardholders. These can be in the form of cashback, reward points, airmiles and so on. These can make your purchases rewarding. You can use the reward points to buy merchandise, use the airmiles to book a flight or use cashback to shop even more!
Disadvantages of Credit Cards
Credit cards are a powerful monetary tool but can also lead to a financial disaster if not used properly. Some pitfalls related to credit cards come in the form of:
High Interest Rate – The interest that is levied on credit card is about 40% p.a. (3.35% p.m.) making it the costliest form of credit. If you happen to withdraw cash using a credit card then you will incur this interest from the day of withdrawal itself along with withdrawal charges, applied on every withdrawal.
Over Spending – One of the factors that bank use to judge credit worthiness of an individual is Credit Utilisation Ratio (CUR). CUR is the ratio of your card spends against the total credit limit extended to you. If you utilise a major portion of your credit limit then your credit score will be negatively impacted. Banks see such people as someone who requires a lot of credit; this is not a desirable trait. It is advised to maintain a credit utilization ratio of 30% or less.
Fraud – Though credit cards are much safer than carrying cash, still they are susceptible to online fraud. Your credit card information can be stolen. Also, if the fraudulent transaction is made by a third party then the onus of informing the bank lies with the cardholder. In this scenario, one must inform the bank of within 3 days of the said transaction. If the customer fails to inform the bank then he/she will bear liability on the transaction.
Fees & Charges – Credit cards charge a certain amount for all the services they provide. These include an annual fee, foreign transaction mark-up fee and so on. If you are unaware of all the fees and charges associated with your credit card then you may end up paying unnecessarily.
Minimum Amount Due Trap – Credit card providers allow their customers to make a minimal payment; that is, 5% of the total amount due. This might seem a great option to the common man but it is not so. If you pay only the minimum amount due consecutively for a few months, you may find yourself in the midst of a large debt due to high interest rates.
You should try and look at credit cards like a tool which can be used to bring convenience and luxury into your life. Credit cards are also very helpful in starting you on your credit journey and maintaining a good score. However, if they are not used responsibly, then they will hurt you both in the short and long term by destroying your credit score and finances. So, you must always pay your credit card bills in full and keep on availing the benefits they offer.