Credit Cards: Best enjoyed with discipline and not falling into the habit of thrift spending; Key points to remember

Updated: 13 Nov 2022, 09:55 AM IST
TL;DR.

If one can use the credit card prudently, not only one can enjoy interest free money for up to 60 days, but also earn rewards or cashbacks for using the credit card. In this article, we are going to highlight major pros & cons of using a credit card

Major pros & cons of using a credit card.

General stance of an individual or a financial expert is to avoid credit at all costs. There are a lot of good reasons why one should stay away from credit cards as most of the people use them irresponsibly & end up in debt. It is also the easiest way to get into debt due to the convenience of using the card.

However, if one can use the credit card prudently, not only one can enjoy interest free money for up to 60 days, but also earn rewards or cashbacks for using the credit card. In this article, we are going to highlight major pros & cons of using a credit card.

READ MORE: Planning to get your first credit card? Make note of these 5 things

Advantages of having a credit card

Access to credit: Credit cards provide an option to use money in case of need or emergency. Compare it with applying for a personal loan from the bank. Once you have a credit card, there is no need for documentation for getting access to short term credit. You can simply swipe the card at a machine and avail it on credit.

Safer payments: Credit card payments are less prone to frauds. If you use your debit card for a payment on a fraudulent link or gateway, the money gets debited from your savings account and fraudsters get access to it easily due to instant settlement. By contrast, when your credit card is used fraudulently, you aren't out any money—you just notify your credit card company or bank about the fraud and don't pay for the transactions you didn't make while the credit card company resolves the matter.

Building a credit score: While applying for a bigger loan eg: home loan, banks usually check the credit score of the borrower. In case you are a first time borrower without a credit score, the bank might charge you a higher interest rate as there is no repayment history of credit. This issue can be resolved by having a credit card which helps you build the credit history by making purchases through the card & paying the credit card bills on time. This improves your credit score and hence creates the chances of getting loans and lower rates.

READ MORE: Looking to make UPI payments through your credit card? Here's all you need to know

Tracking of expenses at one place: There are various modes of payment including cash and UPI. While using multiple payment methods, it becomes difficult to track the expenses as the payment modes are scattered. A credit card can help you overcome the issue of losing track of your expenses. You can put all your expenses on a credit card & track them at one place in your credit card statement.

Rewards & offers: All credit cards come packed with rewards & offers to use your card. These range from cash back to rewards point accumulation each time you swipe your card, which can later be redeemed for shopping, gift vouchers or used towards paying your outstanding card dues. Lenders also offer discounts on purchases made through a credit card, such as on flight tickets, electronic goods, holidays or large purchases.

READ MORE: How to curb your credit card-fuelled spending extravagance? Here are 5 steps

Disadvantages of having a credit card

Higher rate of interest: Credit cards are only good if you can pay your full bill within the given time. 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%-4% per month, which would amount to 36%-48% per annum.

Not paying the full amount due: There are two types of amount displayed on credit card statements, first one is the minimum amount due & second is the full amount due. This is sometimes misleading. Minimum amount due is just 5% of your total bill. This is the minimum amount that the company expects you to pay in order to continue your credit card. 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.

READ MORE: How can you avail credit card against your fixed deposits? Details here

Thrift spending: Since the money is not getting debited from your bank account immediately, one can fall into a trap of thrift spending being unaware of how much you owe. This could lead to falling into a debt trap.

Hidden costs: Credit cards have multiple types of charges 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.

TIP: Credit cards are best enjoyed with discipline. One can actually save a lot of money by using the credit cards smartly. Reward points & offers are added advantages. All of this can be enjoyed by using the card prudently & not falling into the habit of thrift spending.


CA Rohit J. Gyanchandani is Managing Director, Nandi Nivesh Private Limited, A Pune based Wealth Management Company.

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First Published: 13 Nov 2022, 09:55 AM IST