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ToggleCredit cards have become a popular way to pay for things. They offer benefits like easy credit, discounts, rewards, and can help build a good credit history. However, like anything else, they have both advantages and disadvantages.
Credit cards have become increasingly popular in India. As of December 2023, there were over 97.9 million active credit cards. This is a large number, even compared to other countries. Innovations, better technology, easier ways to get a credit card, personalised offers, and improved mobile apps have all played a role in this growth.
As more people use credit cards, it’s important to understand how to use them wisely. The following sections will discuss the advantages and disadvantages of credit cards in more detail.
Credit cards are a very useful financial tool. Despite what all the personal finance experts say, credit cards are very beneficial and help manage your finances better, provided you use them responsibly. Following are some of the benefits why credit cards are considered good.
Credit cards are packed with incentives such as discounts, cashback, and offers. Every time you use a credit card, you accumulate reward points which translate into air miles, cashback, vouchers, and offers. You can use these incentives wisely to cover your expenses, flight tickets, and entertainment.
As a taxpayer, it is important that you have a credit score. In case you don’t have a credit score, one way to build it is through a credit card. Using credit cards effectively will help you build and improve your credit score. Having a good credit score will help you get loans easily with higher credit limits at low interest rates. Moreover, you will have higher bargaining and negotiating power than the ones with a low credit score. So this means if you want to purchase a car or home, you will be able to do it faster as your loan application would be approved easily. Moreover, you can also bargain to get a better price for the asset you are purchasing.
Credit cards are a great way to track your expenses. They record all the transactions you do with them. At the end of the month, it sends you a statement through which you can make a budget or use it for tax purposes. Moreover, every time you spend using a credit card, you will be sent an alert regarding the amount spent and the limit left for you to spend.
This is possibly the biggest advantage of a credit card. It gives you easy access to credit as a credit card works on deferred payments. So, this means you can buy now and pay later. This comes in very handy in case of an emergency or unexpected expense. Moreover, your credit card lets you convert your unpaid bills into EMIs (equated monthly instalments) through which you can make big purchases such as television, refrigerator, and mobile phone and not create a dent in your savings.
Credit cards come with an interest-free period during which the banks do not charge any interest on the credit limit you used. This period typically lasts for 45-60 days. If you pay the balance in full during this grace period, you need not pay interest on the money you used.
You can also apply for personal loans through a credit card. Once you apply for a loan, the money will be credited to your bank account in no time. Having a good credit score and credit history will also help you in securing such loans immediately.
There are always two sides to a coin. Although credit cards are an excellent financial tool, overusing them can be very harmful. They can even put you in a never-ending debt spiral and harm your finances if you aren’t careful when using them. Below are some of the reasons why you should be careful when using or applying for a credit card.
If you fail to pay your credit card bill before the due date, the amount is carried forward, and interest is charged to it. Credit card interest rates can be as high as 3% per month, which aggregate to 36% per annum. If there is any unpaid amount, the interest aggregates and can become a burden on you.
Even though credit card looks like a simple instrument, they have a lot of hidden costs which often go unnoticed by you. Some of the common costs are joining fees, renewal fees, and processing fees. If you end up paying your bill late, the banks charge a penalty and late payment fees on top of the interest on the bill amount. Sometimes, if you repeatedly pay your credit card bills late, banks can reduce your credit limit, which will affect your credit score.
Once you delay your credit card payments, you will end up in a never-ending spiral of debt. You will be charged an interest (which is, by the way, exorbitantly high) on the due amount, and on top of this, you will be charged late fees and penalties. Although you end up repaying after a few months, the damage is already caused as this becomes a remark on your credit history, and your credit score falls. A bad credit score can result in high-interest loans and lower credit limits.
Credit card companies and banks confuse people by telling them that they need to pay only the minimum due amount to continue using their cards. Most users believe the minimum due is their monthly bill and don’t realise the debt trap they are falling into. Banks surely allow you to use the card if you pay the minimum amount, but they charge interest on the rest, which aggregates to become a huge amount in a few months. Moreover, users might also think their bill is very low and end up overusing the card.
Banks do send constant reminders to credit card users to pay the bill amount. If you fail to do so, they charge interest and a penalty. However, after three months, they call you continuously to recover the dues. Repeated calls can be very annoying and can also increase your stress levels as you are constantly reminded of your debt.
Credit card frauds are quite common. They have been in existence right from the time credit cards were introduced in the market. Although banks have been taking steps to improve fraud prevention systems, hackers and fraudsters have found new ways to steal money. The cardholder is always under stress and tension every time he shops online or swipes in a store.
The biggest harm credit cards can do is break your financial discipline. With every swipe, when you don’t see the bank balance going down, you tend to spend money recklessly, sometimes more than what you can afford. Credit cards have a tendency to tempt you with rewards and offers. Hence you end up using the card for all kinds of expenses, making you lose track of your spending. This will land you in a never-ending spiral of debt, and you might not be able to save money for the future.
Advantages | Disadvantages |
Convenience – Easy to carry and use. Some credit cards are available virtually. | Debt accumulation – Easy to overspend on purchases |
Emergency funds – Useful in emergencies where liquid cash isn’t handy. | Interest rates – High interest rates are levied if balances aren’t paid back. |
Rewards – Earn reward points, cashback, or travel miles. | Annual fees – Some cards charge yearly fees. |
Builds credit history – Helps establish credit. | Fraud risk – Vulnerable to identity theft and fraud. |
Purchase protection – Offers buyer protections for transactions | Impulse purchase – Temptation to impulse buy products |
Insurance benefits – Certain credit cards offer medical, travel, and purchase insurance over products and services | Overspending – Easy to lose track of expenses and spoil the budget |
Grace period: Interest-free period if paid in full before the due date | Cash advance fees – Very high fees for cash withdrawals |
Accepted worldwide: Widely accepted for transactions by merchants across the globe | Impact on credit score if misused or if you miss out on repayments |
Online shopping – Convenient for online purchases | Minimum payments – Can lead to long-term debt. |
You can build rewards and perks over time | Dependency – Reliance on credit can lead to financial stress |
Credit cards aren’t bad for your financial health. In fact, a credit card can be a useful tool to reduce your expenses by taking advantage of the rewards. However, you must be careful while choosing a credit card. Check the processing fees, rewards and offers, and terms and conditions before applying for a credit card. Once you get a credit card, use it wisely to avoid unnecessary fees and interest payments. Hope these advantages and disadvantages of Credit Cards will help you decide your next credit card.
Credit cards are an excellent financial tool to manage your budget and expenses, build a credit score, and get easy credit. However, anything in excess is harmful. So don’t overuse your credit cards and use them optimally to take advantage of them.
Credit cards are not bad. However, this misconception is mainly due to the fees, charges, and interest rates on credit cards that arise from late payments or not paying the balance on time. Some cards have high processing fees, late fees, and penalties. On top of these fees, the interest charges on the unpaid balance are exorbitantly high. Hence most consider credit cards as bad. However, if you pay off your balance on time, you can avoid all these expenses and get rewards and cashback.
No, credit cards aren’t bad for poor people. However, taking a credit card without having enough savings isn’t advised. It is always better to have an emergency fund in place before you start using a credit card.
It is completely fine not to have a credit card. You can use cash or debit cards for your purchases instead of credit cards. In case you want to build a credit history, you can always do so with other kinds of loans, such as car loans, home loans, etc.
A credit card was first introduced in 1958. Prior to that, there was never a concept of a credit card. So, if people lived without a credit card before, you can also live with it now. You can build your credit score through other kinds of loans instead of using a credit card for a good credit score. Many payment apps and wallets are offering cashback on payments and money transfers. So you can get rewards without using a credit card.
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