Credit cards have become an essential part of our lives, due to its ease of use and convenient payment options. A credit card’s discounts, deals, and discounts are unmatched by any other financial product and spell a boon for the savvy user. However, if used improperly or if you spend more than you can afford to pay, credit cards can become debt traps.
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If this is your first time you are dealing with credit, here are a few of the advantages and disadvantages of credit cards.
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Advantages of Credit Cards
1. Easy access to credit
A credit card’s greatest benefit is its ease of use. You can use your credit card now and pay for your purchases later thanks to their deferred payment system. You won’t lose money every time you swipe because the money used doesn’t leave your account.
2. EMI facility
A credit card’s greatest benefit is its ease of use. You can use your credit card now and pay for your purchases later thanks to their deferred payment system. You won’t lose money every time you swipe because the money used doesn’t leave your account.
3. Offers and incentives
The majority of credit cards come loaded with offers and incentives to use them. These include cash back and the accumulation of rewards points with each swipe of your card. You can save money by taking advantage of discounts offered by lenders when you use a credit card to make large purchases, like vacations, flights, or other large purchases.
4. Increasing your credit limit
Credit cards give you the opportunity to increase your credit limit. Because it enables banks to view an active credit history based on your card repayments and usage, this is crucial. Your credit card is important for future loan or rental applications because banks and other financial institutions frequently use credit card usage as a way to assess a potential loan applicant’s creditworthiness.
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5. Flexible credit
Credit cards offer an interest-free period, during which your outstanding credit is not subject to interest charges. If you pay off the entire balance due by your credit card bill payment date, you can get free short-term credit for 45 to 60 days. As a result, you can take advantage of a credit advance without incurring the costs that come with having an unpaid credit card balance.
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Disadvantages Of Credit Card
1. Minimum due trap
The biggest drawback of a credit card is the minimum balance due that appears at the top of a bill statement. When in fact, the minimum amount is the minimum amount that the company expects you to pay in order to continue receiving credit facilities, many credit card holders are misled into thinking that the minimum amount is the total due.
As a result, customers mistakenly believe their bill is low and spend even more, racking up interest on their outstanding balance, which could eventually amount to a significant and unmanageable sum.
2. High interest rate
If you don’t pay your bills by the time they are due on your bill, the amount is carried over and interest is added to it. Purchases made after the interest-free period are subject to this interest accrual over time. The average interest rate on a credit card is 3% per month, or 36% per year, which is quite high.
3. Easy to overuse
Revolving credit is easy to overuse because your bank balance stays the same. Because of this, it might be tempting to put all of your purchases on your card without knowing how much you owe. This could cause you to spend more than you can afford to pay, triggering a vicious cycle of debt and high interest rates on future payments.
4. Hidden costs
At first glance, credit cards appear to be straightforward, but there are a number of hidden fees that could increase overall costs. Late payment fees, joining fees, renewal fees, and processing fees are just a few of the taxes and fees associated with credit cards. Your credit score and your chances of getting credit in the future would suffer if you missed a card payment or paid it late multiple times, both of which could result in a penalty.
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5. Credit card fraud
Even though credit card fraud is not very common, you might be a victim of it. It is now possible to clone a card and gain access to confidential information through which another person or organization can make purchases on your card thanks to advancements in technology. If you suspect card fraud, carefully examine your statements for purchases that appear suspicious and immediately notify the bank. If the fraud is proven, banks typically waive charges so that you won’t have to pay for the thief’s purchases.
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Tips to Use Your Credit Card Properly
- Don’t spend more money than you can repay.
- To keep track of how much you spend, you shouldn’t use your card for everyday purchases.
- When you reach 40% of your available credit limit, you should control your spending.
- When making large purchases with your credit card, select an EMI option to avoid paying interest on the balance.
- Always set aside at least 40% of your credit limit for unforeseen circumstances.
- Plan your purchases and only make planned purchases with your card. Don’t use your credit card when you’re tempted.
- To avoid paying interest, always try to pay your credit card bills in full each month.
- Never miss a card payment because doing so will result in more expensive fees and a hefty fine.
Read: Debt to income ratio: Why is it important and how to calculate?
If You Choose Not to Get a Credit Card
If you choose not to get a credit card, a few steps can make your life easier:
Create a Budget
Create a budget and stick to it. Without credit to rely on, it’s important to make sure you have the money you need on-hand. If you haven’t already crafted a monthly budget, consider starting out with something simple, like the 50/30/20 method. This will help you determine how much of your after-tax monthly income you have to spend in three different categories: essentials, wants, and savings. Check out our calculator below to see how your budget might look.
Build an Emergency Fund
Aim to have three to six months’ worth of expenses in your savings account so you’ll be covered for life’s surprises.
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A smart investor would want to use the SAVE-BORROW-PAY mantra instead of BUY NOW – PAY LATER. He would save at a higher interest cost, borrow at a lower cost and rescue himself form unnecessarily exorbitant interest costs. This is possible by having financial discipline and by planning, investing and saving and borrowing using chits.
Chit funds are a tried-and-true financial tool that has been used in India for ages. Chit fund investments are a monthly investing strategy that let you put your extra cash in a safe and convenient place. Compare this to taking out a loan and setting aside the same amount of money each month for the interest payment. The family has additional financial constraints due to both interest and principal repayment. The money in a chit fund, however, is your own money. When you take out this money to pay for your family’s necessities or expenses, you do not owe anyone anything.
However, in order to ensure our future, they call for a small amount of financial restraint in our spending right now. Additionally, when the investments begin to pay off, they provide us with enormous financial stability and security.
You must immediately begin saving, no matter how little your starting point is. If you keep waiting for the next bonus check or stock option, you won’t save anything. You never know when bills will come in, when business will briefly slow down, or when there will be a health problem at home.
The Money Club offers a safe and secure mobile platform for P2P chit fund-based savings. Its community banking app aims to make saving, investing, and borrowing money more efficient.
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FAQs related to advantages and disadvantages of credit cards
Your outstanding credit will not be subject to interest charges during the interest-free period provided by credit cards. If you pay off the entire balance due by your credit card bill payment date, you can get free short-term credit for 45 to 60 days.
Your credit scores are impacted by your credit cards. Your credit score will remain good as long as you pay your credit card bills on time. However, if you pay your credit card bills after the due date, it will have a negative effect on your credit score.
If you use your credit card responsibly, yes, it is beneficial. A lot of people end up in credit card debt because they don't use the card responsibly.
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