Advantages & Disadvantages of Credit Cards

The biggest advantage of a credit card is its easy access to credit. Credit cards function on a deferred payment basis, which means you get to use your card now and pay for your purchases later. The money used does not go out of your account, thus not denting your bank balance every time you swipe.

Building a line of credit

Credit cards offer you the chance to build up a line of credit. This is very important as it allows banks to view an active credit history, based on your card repayments and card usage. Banks and financial institutions often look to credit card usage as a way to gauge a potential loan applicant's creditworthiness, making your credit card important for a future loans or rental applications.

EMI facility

If you plan on making a large purchase and don't want to sink your savings into it, you can choose to put it on your credit card as a way to defer payment. In addition to this, you can also choose to pay off your purchase in equated monthly installments, ensuring you aren't paying a lump sum for it and denting your bank balance. Paying through EMI is cheaper than taking out a personal loan to pay for a purchase, such as a television or an expensive refrigerator.

Incentives and offers

Most credit cards come packed with offers and incentives to use your card. You can earn cashback and reward points every time you swipe your credit card. Later, you can redeem these points for air miles or use them to pay your outstanding card dues. Lenders also offer discounts on purchases made through a credit card, such as on flight tickets, holidays or large purchases, helping you save.

Flexible credit

Credit cards provide an interest-free period, letting you use credit without paying interest for a specific duration. Ranging between 45-60 days, you can avail free, short-term credit if you pay off the entire balance due by your credit card bill payment date. Thus, you can benefit from a credit advance without having to pay the charges associated with having an outstanding balance on your credit card.

Record of expenses

A credit card records each purchase made through the card, with a detailed list sent with your monthly credit card statement. You can use this to track your spending and purchases, which helps when creating a budget or preparing for taxes. Lenders also provide instant alerts each time you swipe your card, detailing the amount of credit still available as well as the current outstanding on your card.

Purchase protection

Credit cards protect your purchases with insurance in case they are lost, damaged, or stolen. You can use your credit card statement to support your claim if you decide to file one.

Disadvantages of Credit Cards

Minimum due trap

One major drawback of credit cards is the “minimum due” amount shown at the top of the bill. Many users mistakenly believe this is the full amount they need to pay. In reality, it’s just the smallest payment required to keep using the card. Paying only the minimum can lead to high interest charges and long-term debt.

This results in customers assuming their bill is low and spending even more, accruing interest on their outstanding, which could build up to a large and unmanageable sum over time.

Hidden costs

Credit cards appear to be simple and straightforward at the outset, but have a number of hidden charges that could rack up the expenses overall. Credit cards have a number of taxes and fees, such as late payment fees, joining fees, renewal fees and processing fees. Missing a card payment could result in a penalty and repeated late payments could even result in the reduction of your credit limit, which would have a negative impact on your credit score and future credit prospects.

Easy to overuse

With revolving credit, since your bank balance stays the same, it might be tempting to put all your purchases on your card, making you unaware of how much you owe. This could lead to you overspending and owing more than you can pay back, beginning the cycle of debt and high interest rates on your future payments.

High interest rate

If you do not clear your dues by your billing due date, the amount is carried forward and interest is charged on it. This interest is accrued over a period of time on purchases that are made after the interest-free period. Credit card interest rates are quite high, with the average rate being 3% per month, which would amount to 36% per annum.

Credit Card fraud

Though not very common, there are chances you might be victim of credit card fraud. With advances in technology, it is possible to clone a card and gain access to confidential information through which another individual or entity can make purchases on your card. Check your statements carefully for purchases that look suspicious and inform the bank immediately if you suspect card fraud. Banks usually waive off charges if the fraud is proven, so you will not have to pay for purchases charged by the thief.

How To Use Your Credit Card Right

To avoid being debt-laden due to unfettered spending on your credit card, keep the below tips in mind:

1. Read the fine print so you're aware of all the charges and conditions that govern your card.
2. Don't spend more than you can pay back.
3. Avoid putting daily purchases on your card so that you're aware of how much you're spending.
4. Periodically check your credit limit and rein in spending when you've crossed 40% of your available credit limit.
5. Choose an EMI option for large purchases put on your card to avoid having to pay interest on outstanding card amounts.
6. Always keep at least 40% of your credit limit for emergencies.
7. Plan your purchases and use your card only for planned purchases. Avoid impulse buys on your credit card.
8. Always try to pay your credit card bills in full each month to avoid the interest charges.
9. Never miss a card payment, as this will result in higher charges and a hefty penalty.
10. Approach the bank if you've overspent on your card. They could help you devise a pay-back plan with a fixed rate of interest to avoid you falling deeper into debt.