What are the Advantages and Disadvantages of Credit Card?
A credit card is a credit facility provided by banks and NBFCs that allows customers to borrow a certain amount of money within a pre-approved credit limit in order to purchase goods and services. Also, special offers, discounts, and occasional deals are frequently made available to credit card holders. But, before you apply, read thoroughly about the advantages and disadvantages of a credit card.
This blog decodes all the questions and pros and cons of using a credit card. Read on!
What is a Credit Card?
Credit cards are offered by banks and NBFCs (Non-Banking Financial Company) to carry out seamless, cashless transactions online and offline. The credit card lender sets a pre-decided limit on your credit card based on your income, credit score and other factors. You can use the credit card for various transactions up to the maximum credit limit. The credit card bill is regenerated at a regular interval. If you pay the bill within the due date, interest will not be imposed. However, after this period, the bank will charge a certain interest rate.
Advantages and Disadvantages of Credit Card
Credit cards offers convenience and flexibility in managing our finances. However, they also come with certain drawbacks that can lead to debt and financial distress. Know the advantages and disadvantages of credit cards, from earning rewards and building credit to high interest rates and hidden fees. By understanding these cons and pros of credit card, you can make informed decisions about how to use credit cards wisely and avoid falling into financial traps.
Advantages of a Credit Card
A credit card has several benefits. They are as follows:
1. Easy Access to Credit
The first benefit that distinguishes credit cards is the ability to obtain credit quickly. When making a purchase, you can use your credit card to make a quick and easy payment. The bank makes the payment on your behalf, and you can pay the balance when your credit card bill arrives.
2. EMI Option
Credit cards are excellent for purchasing goods and services with a low monthly EMI. This alleviates the burden of having to pay the money in one lump sum. Furthermore, EMI payments via credit cards may be more convenient than obtaining a personal loan.
3. Record of Expenses
Every purchase made with a credit card is recorded. Each month, your credit card statement will include a list of your purchases. This is especially useful for keeping track of your budget and expenses.
4. Exciting Offers and Cashbacks
Most banks offer credit cards with a variety of offers, cashbacks, and rewards. These offers and rewards are available whenever you make an online or offline purchase. You can also get cheaper air tickets, train tickets, hotel reservations, grocery shopping, and so on.
5. Protection of Purchase
Credit cards provide extra security in the form of insurance for card purchases that are lost, damaged, or stolen. If you want to file a claim, you can use the credit card statement to back it up.
6. Improving Credit Score
Credit cards allow you to build up a credit line. This is critical because it allows banks to view an active credit history based on your card repayments and card usage. Banks and financial institutions frequently use credit card usage to assess a potential loan applicant’s creditworthiness, making your credit card important for future loan or rental applications.
Disadvantages of a Credit Card
Here are a few disadvantages of using a Credit Card:
1. Habit of Overspending
Although credit cards provide you with adequate credit for a long time, you must be prudent when spending the money. Spending too much money on unnecessary purchases may lead to a severe debt trap in the future. So, determine your affordability and avoid the habit of overspending.
2. High Rate of Interest
If you do not pay your credit card bill on time, the bank will charge you interest. The interest rates on these cards are typically high, with a 3% average monthly rate. However, if the monthly rates are added together, the annual rate rises to 36%.
3. Deception
Your credit card can be susceptible to fraudulent transactions. Thieves or impostors can even steal the details from your credit card and misuse it for carrying out unauthorized transactions. Your credit card details falling in the wrong hands can lead to serious financial troubles.
4. Hidden Costs
Credit cards may appear easy and straightforward initially, but they comprise numerous hidden costs that can increase the expense amount by a high margin. These extra charges can come in the form of late payment costs, renewal fees, processing fees etc. Nevertheless, if you miss any payment, it can cause a penalty and diminish your credit history.
5. Restricted Drawings
Credit cards, unlike debit cards, do not offer as many benefits when it comes to cash withdrawals. This is due to the fact that some credit cards charge an additional fee in addition to an annual interest rate of approximately 40%.
6. Minimum Due
The most significant disadvantage of a credit card is the minimum due amount displayed at the top of a bill statement. Many credit card holders are misled into believing that the minimum amount is the total amount owed, when in fact it is the minimum amount that the company expects you to pay in order to continue receiving credit facilities. As a result, customers assume their bill is low and spend even more, accruing interest on their outstanding balance, which can quickly add up to a large and unmanageable sum.
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How to Use Credit Cards Wisely?
While weighing the cons and pros of credit cards keep in mind that many credit card users in India are unaware of how to use a credit card wisely. Here’s a checklist to help you reap the benefits of a credit card while minimising the drawbacks:
- Spend around 50% of the card limit and avoid unnecessary purchases.
- You can avoid high-interest rates or debt burdens if you make the payments of your credit card bills within the specified time.
- Go through the terms and conditions of the credit card carefully.
- Verify your credit limits on a timely basis and stay alert if you have spent more than 40%.
- If you have spent the entire amount, immediately take help from the bank. They will formulate a scheduled pay-back plan so that you cannot go further into debt.
- For large purchases, consider an EMI option. put on your card in order to avoid paying interest on outstanding card balances
Should You Apply for a Credit Card?
There are several merits and demerits of a credit card. But, one should apply for a credit card facility considering the following reasons.
1. Postponed Payment
Deferred payment allows you to buy something and pay for it later. This simplifies credit access for the cardholder. In addition, unlike a debit card, your bank account will not be debited each time you use the credit card.
2. Incentives
Credit cards now provide a variety of incentives and offers. Banks promote their credit cards using these incentives. Discounts, cashback, and reward points can all be used to make future purchases such as plane tickets.
3. Emergency Payments
When making large payments that appear out of nowhere, a credit card comes in handy. A credit card, for example, can be extremely useful in the event of unexpected medical expenses.
4. Foreign Transactions
Having a credit card eliminates the need to carry and convert cash while travelling abroad. Credit cards, while charging a higher interest rate, are more convenient to use than foreign cash.
5. Record of Expenditure
Every month, a credit card statement arrives, providing a detailed record of all payments made, available credit, and outstanding balances on your card. This is extremely useful when creating a budget. To make things easier to understand, the bank sends an SMS or email to the card user each time it is swiped, ensuring not only a record but also a security measure against theft.
Final Word
Knowing how credit cards work can help in improving the spending pattern as well as in reducing the chances of getting into debt with the lender. But, before applying, read more about the advantages and disadvantages of a credit card to find the best-suited credit card for you.
FAQs
Credit cards offer an interest-free period of about 2-3 months, during which no interest is charged. However, the credit-free period or grace period of a credit card will usually depend on the financial institutions.
Yes, using credit cards is quite safe if you borrow them from a reputed credit network. Do make sure to keep the card details confidential. If it goes in the wrong hands, it can lead to fraud and unauthorized transactions.
Credit cards can help in insuring any expensive purchase you make through the card. In cases of damage or theft, the credit card bill will help you to file an insurance claim and thus help you to cover financial expenses due to theft or loss of an object.
When you make a purchase or draw money from debit cards, it will reduce the balance from your account, whereas credit card lets you borrow from a certain credit amount fixed by banks. Also, credit cards give better consumer protection than debit cards.
ATM cards enable a customer to withdraw funds from a bank account via an ATM. But a credit card will allow you to make online and offline payments for purchases. You don’t need to have money in your credit card balance. You can spend from a credit limit set by banks.
Building a credit debt and carrying a balance and paying high interest.
No they are not, provided the balance and dues are paid on time.
Simply go to an ATM and withdraw the cash you require, up to the limit set. It does not require any special approval from the bank. And you repay it, along with the fees associated with cash withdrawals. Every credit card has a credit limit, which is the most money that can be spent on that card.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
