Advantages & Disadvantages of Credit Card
Created on 21 May 2022
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Updated on 13 Oct 2022
The simple millennial way to differentiate between Rich & Not So Rich:
Credit Card User: Rich
Buy Now Pay Later User: Not so Rich
What’s your category? 😛
Having a credit card is more like a status symbol. If you have it, no one cares, but it's like a sin if you don't have it. People keep more than one card in their wallets. But what's the fuss around it? People who don't own a credit card and are considering having one often have the question - should I get a credit card? You can do everything that can be done with a credit card and a debit card. So, why have a credit card? Like almost any object under the Sun, having a credit card has pros and cons. Let's discuss the advantages and disadvantages of credit cards and consider if you want one.
Credit Cards: An Overview
Credit cards are a pre-approved line of credit. It means it has a pre-sanctioned limit. You can use the card up to the limit for any transaction. You can use the card for hotel booking, restaurants, petrol pumps, online shopping, etc. Once used, the credit card will have dues. You need to clear the dues or minimum due amount after a certain period. If you fail to pay the due amount within that period, you only have to pay charges on that. So, even if you don’t have enough money on your account for a specific period, you can still purchase and pay it back once you receive funds.
Advantages of Credit Card
Frankly, the advantages of having a credit card are many. It's been a preferred line of credit for billions of people. Let's look into the benefits first.
Buy Now Pay Later:
This might be the second most attractive reason for having credit cards. (I will come to the first one soon.) It has twofold advantages. First, it is an additional line of credit for the cardholder. In emergencies, significant expenses, or special occasions, you don't need to break fixed deposits or take expensive personal loans. You can simply pay with your credit card. Secondly, as you have to pay almost a month later, you will keep earning interest on that amount. Also, you can pay the amount in EMI as well. So, you don't have to pay the entire amount in one go.
In case of internet fraud or theft, debit card money gets directly debited from your account. Then you have to follow up with the bank for a remedy. However, for a credit card, money will be deducted after a month, so you can block the transaction while the bank does the investigation.
Credit card companies give attractive benefits in terms of reward points and cashback. You can redeem your reward points for awesome gifts and merchandise. And in the case of cashback, the money is directly given back to your account. For example, for an electricity bill payment, some credit card companies give INR 50/- (an example only; the actual amount may be different) cashback straight. This is an excellent benefit of having credit cards.
Manage Separate Accounts for different purposes:
This is particularly beneficial for sole proprietorship small and medium business holders and for those salaried persons who do not get a card from the office but has to be on official travel a lot. Keeping separate accounts helps to manage the accounts better. For example, if you go for an office tour, you can use your credit card. So when you submit the bill, you can easily segregate the tour expenses from your personal expenses.
Manage good credit history:
This is the most significant benefit of having a credit card. Credit history, like the CIBIL score, is substantial when applying for a loan. It may dictate your eligibility for the loan, loan amount, and even interest rate. Poor credit history persons pay higher interest rates. Managing a credit card responsibly helps you to have a good credit score.
Disadvantages of credit card
It is not all rosy to have a credit card. There are drawbacks as well. Let's discuss some of the disadvantages of having a credit card that you might have:
Since you don't have to pay immediately, you may spend more than you can pay. For example, you may go to a shop to buy a refrigerator and buy a 48'' TV and microwave oven along with the fridge. This is human nature, which can be a big problem, particularly when you purchase online with a credit card.
Minimum Pay Loop:
This is related to the first point of disadvantage. Credit card companies offer that a minimum amount can be paid off your total bill, and the rest you can pay later. People fall into the overspending trap and pay interest at a high rate to credit card companies.
The interest rate on the due amount can be very high with credit cards. It is higher than personal loans and can go up to 50% per annum (Annual Percentage Rate or APR). So, if you fail to pay your bill, you end up paying a lot of money as the interest rate.
Hidden charges of credit cards:
Nothing is free in life. That goes for credit cards as well. Even with the ‘lifetime free credit cards’, there are charges associated which will be activated in specific situations. So, if you don't read fine points, you pay extra.
So, what is the verdict? Is credit card beneficial? Do the advantages more than the disadvantages? In my opinion, it does. If you follow good discipline in maintaining credit cards, your life is much easier. Some of the points you need to remember. Like, you should not spend more than what you can payback. Pay the total bill amount and not only the minimum due amount. Instead, you can choose the EMI option for large transactions.
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That was all for today. Until next time, Happy making sound financial decisions.
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