Just like a coin has two sides, everything has its own advantages and disadvantages, and Credit cards are no different. When you think about whether or not you should buy a credit card, you must know that a credit card would never hurt your financial health, if you use it properly. It will, instead, help you enhance your financial health.
However, there are a few reasons why you would be worried about making the decision of getting a credit card for yourself. Listed below are some of the credit card advantages and disadvantages of credit cards. We have also explained how you can overcome the disadvantages of credit cards and use them effectively.
Credit Card Advantages
Credit cards have surely become a must-have financial tool. Listed below are a few reasons for the hype that has been created around them-
- Luxury of credit
Having a credit card gives you the luxury of spending out of your pockets. Credit cards allow you to borrow money from a bank and make necessary purchases for the time being. All you need to do is plan your finances well so that you can repay the credited amount well in time. Moreover, you can borrow as much as you need (within your credit limit) on an interest-free credit period of upto 45-50 days.
- Affordable EMIs
Making big purchases with your credit card? Don’t worry about repaying the huge amount. You can choose to convert your billed amount into easy, affordable EMIs and pay the billed amount over a long period of time. This will avoid the burden of making a huge hole in your pocket as you pay your credit card bill.
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- Build financial health
Timely repayment of credit card bills help build a healthy financial status. One of the major credit card benefits is that its proper usage can actually help you build and maintain a line of credit. This line of credit can be used by banks to view your card usage and credit repayments.
- Improves credit score
Using a credit card effectively shows that you are able to maintain your financial situation well. Hence, having a credit card helps individuals convert their low credit score to a higher one. Credit cards are often used as “credit builders” as a way to improve and enhance your borrowing habits. As you use your credit card properly, you will gradually be able to build your credit rating and prove that you are able to manage your loans and credits over a period of time.
Credit cards are a safe and secure financial instrument. As compared to other financial products, credit cards hold a lot more safety features. Unlike the old credit cards, the ones being issued in the recent times are secured with EMV (Europay, MasterCard and Visa) chip, which eventually saves you from being prey to any frauds. Additionally, various banks and credit card issuing companies have introduced various security measures that ensure safety of transactions.
Along with this, the Reserve Bank of India has made it mandatory for the banks to prove the customer’s liability in case there are any unauthorised electronic banking transactions. Hence, the card holder does not have to prove his/her innocence if there’s any fraudulent online transaction.
- Balance Transfer
If used properly, one of the major credit card advantages is that it allows you to transfer funds from one account to another, even if they are not from the save credit card providers. This option enables you to lower the applicable interest charges. For instance, if you have a pending bill of one credit card, and not sufficient funds to pay the bill at the moment, then you can choose to transfer the balance from one credit card to the other and make benefit of the interest rate charges of the new card. Additionally, in certain cases, you may also avail the benefit of zero-percent introductory interest charges on balance transfer. However, in a few cases, you may also have to pay a fee for transferring the balance.
- Easy loan approvals
Credit cards also allow you to borrow loans from banks. When you do so, your bank will transfer money against your available credit limit to your bank account. Once your loan gets approved, the applied loan amount will be transferred to your bank account in a few minutes. You must also note that having a healthy credit/borrowing history will also work effectively on your credit score.
- Additional benefits
There are a lot of additional credit card benefits offered on the transactions made using a specific type of credit card. These additional benefits can be provided to you in the form of reward points, cashbacks and discounts that can be redeemed on the future transactions. You can also choose to buy the credit card depending upon your specific needs. This type of credit card will offer additional benefits on the amount spent.
- Record of expenses
When you use a credit card, all the transactions made on it will be saved. These details will be visible to you in your credit card statement. Having a complete track of your expenses made on a credit card will help you manage your finances and build the monthly budget in a better way.
Disadvantages of Credit Card
While they have innumerable benefits, there may also be a few disadvantages of credit card. As it is said, excess of anything is harmful, it is recommended that you use your credit card effectively. Here are some factors that may prove negative if you don’t use the credit card effectively.
Since credit cards offer you credit to a huge extent, there may be instances where you make unnecessary purchases of the available limit and fall in debt trap later.
Solution: To avoid overspending on your credit card, you must not spend more than 50%-60% of your credit limit. Ensuring this, and staying a little tight on your unnecessary expenses will keep you away from overspending and hence, will not let you fall in debts.
Even though credit cards are considered one of the safest financial tools, they may still be susceptible to online frauds. Fraudsters or thieves may also steal your credit card information and make improper use of the same. Additionally, if the fraudulent transaction is made by any third party, it becomes the cardholder’s responsibility to inform the bank within three days of occurrence of the transaction.
Solution: To safeguard yourself against such fraudulent transactions, you can choose to disable any foreign transactions on your card. Additionally, you are advised not to open any emails or messages that look suspicious to you. Along with this, do not hand over your credit card to anybody and/or share your credit card details or PIN with anyone.
- High Interest Charges
There is a very high interest rate applicable on the billed amount using a credit card, which may eventually lead you to high debts. However, this interest is applicable only in case of late payments of the credit amount.
Solution: If you continue to pay your credit card bills on time, you can easily get rid of the high interest charges on a credit card.
Upon making a certain specific payment using a credit card, you might have to incur an additional fee known as surcharge. This fee, is however, generally applicable on expenses made on fuel and railway bookings.
Solution: Certain credit cards, such as the fuel credit card offer a fuel surcharge waiver. The surcharge fee is generally waived off when the transaction amount is within a specific range as decided by the bank. Additionally, there might also be a limit on the monthly surcharge waiver amount.
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- Limited Cash Withdrawal
Unlike debit cards, cash withdrawals from credit cards charge a fee. There is an applicable annual interest rate of around 40% (3.35% per month) on withdrawing cash using a credit card.
Solution: To stay away from paying any additional charges, which is considered to be one of the major disadvantages of credit card, you must opt not to withdraw any amount using your credit card. Use your debit card to make cash withdrawals, instead.
- Additional Expenses
A lot of credit cards include some additional expenses such as the annual credit card fee, charges on foreign transactions, charges on cash withdrawals, etc.
Solution: Before you apply for a credit card, you must go through all the related terms and conditions so that the applicable expenses are not hidden. You must be aware of all the expenses that you may have to incur on your credit card before you choose the type of credit card that you want to buy.
- Minimum Due
One of the major disadvantages of a credit card is the minimum due amount mentioned at the top of the credit card statement. A lot of credit card holders, especially the new ones, mistake the minimum due amount for the total credit card bill amount and do not pay the bill amount in full. Due to this, users believe that their credit card bill is actually low and eventually end up spending a higher amount and paying high interest charges.
Solution: It is important to study the credit card statement thoroughly. It is equally important to be aware of all the major credit card terms in order to avoid falling into any sort of trap.
Should You Apply for A Credit Card?: The Final Call
Buying a credit card would prove to be the right choice, if used effectively. Some of the most common and valuable credit card benefits include financial luxury and convenience. Additionally, they also help you maintain a healthy financial history, which eventually works in your favor as you apply for loans in the future. However, you must learn to use your credit card effectively from the beginning itself. Failing to do so will hurt your credit score majorly.
To conclude, it can be clearly inferred that irrespective of all the credit card advantages and disadvantages, you should go for buying a credit card for yourself. As you do so, include habits like paying your credit card bills well in time, and handling your credit card expenses responsibly in your financial routine, which will eventually lead you to availing the maximum benefits that a credit card has to offer.