A credit card has become essential in our lives, offering easy usage and convenient pay-back options. The discounts, offers, and deals provided by credit cards are unparalleled, offering great benefits to smart users. However, if not used correctly, credit cards can lead to debt traps, especiallyif you spend beyond your means and can't repay the bill on time.
Advantages of Credit Cards
Easy Access to Credit: A major advantage of credit cards is their easy access to credit. You can use your card for purchases and pay for them later, without immediately affecting your bank balance.
Building Credit History: Credit cards help you build a credit history. This is crucial for banks to assess your creditworthiness when you apply for loans or rentals. Regular repayments and responsible card usage can improve your credit score, making it easier to get loans in the future.
EMI Facility: Credit cards offer an EMI facility, allowing you to spread out payments for large purchases over several months. This helps you manage your expenses without draining your savings. Plus, paying in EMIs can be more cost-effective than taking out a personal loan for big purchases.
Flexible Credit: Credit cards offer an interest-free period, typically lasting 45-60 days. During this time, you can make purchases without accruing interest if you pay off the entire balance by the due date. This provides short-term credit without incurring extra charges for carrying a balance.
Record of Expenses: Credit cards keep a record of every purchase you make, detailed in your monthly statement. This helps you track your spending habits and expenses, which can be useful for budgeting and tax purposes. Additionally, lenders often provide instant alerts for each transaction, giving you updates on your available credit and outstanding balance.
Incentives and Offers: Credit cards often come with rewards and incentives like cash back and reward points for every transaction. These rewards can be redeemed for various benefits like air miles or used to offset your card dues. Additionally, many cards offer discounts on purchases, such as flights or holidays, helping you save money.
Disadvantages of Credit Cards
High Interest Rates: If you don't pay your dues by the due date, you'll incur interest charges on the remaining balance, often at high rates. Credit card interest rates can be as high as 3% per month, equivalent to 36% per year, making it expensive to carry a balance.
Credit Card Fraud: While not common, credit card fraud is a risk. Technological advancements make it possible for thieves to clone cards or access confidential information for unauthorized purchases. It's important to review your statements for any suspicious activity and report any fraudulent charges to your bank immediately. In many cases, banks will waive charges for proven fraud, protecting you from financial loss.
Minimum Due Trap: One major downside of credit cards is the minimum due amount displayed on your bill statement. Many cardholders mistakenly believe this is the total amount they owe, when it's actually the least they need to pay to maintain their credit privileges. This can lead to overspending and accumulating interest on the remaining balance, resulting in a significant debt burden over time.
Hidden Costs: Credit cards may seem simple, but they often come with hidden charges like late payment fees, joining fees, renewal fees, and processing fees. Missing payments can incur penalties and even reduce your credit limit, negatively impacting your credit score and future borrowing opportunities.
Easy to Overuse: Revolving credit can make it tempting to use your card for all purchases, leading to overspending and a lack of awareness about your total debt. This cycle of overspending can result in accumulating debt and high interest rates on unpaid balances.
FAQs on Advantage & Disadvantage of Credit Card
What is the insurance that a credit card offers?
Credit cards provide extra protection by offering insurance for purchases that are lost, damaged, or stolen.
Should I take a loan or use the EMI facility on my credit card?
Choosing to pay through Equated Monthly Installments (EMI) is often more cost-effective than taking out a personal loan to buy items like a television or a refrigerator.
Do credit cards impact credit scores?
Yes, your credit cards can affect your credit scores. Timely payment of credit card bills helps maintain a good credit score, while late payments can negatively impact it.
Can I pay the minimum amount due?
Many credit card holders mistakenly think that the minimum amount due is the total they have to pay, but it's actually the smallest amount the company requires to maintain your credit privileges.
Do credit cards offer a credit-free period?
Credit cards offer an interest-free period, meaning you won't be charged interest on your outstanding balance for a certain period, 45-60 days. This gives you a short-term credit window without accruing interest if you pay off your full balance before the due date.
How much credit limit can I use?
It's important to keep an eye on your credit limit and make sure you haven't used more than 40% of it.