Imagine a situation, it is a last week of month, you have run out of money. You are strolling past a shop and you love the dress displayed in discount section. You are so tempted to buy it but you do not have any money. On the other hand, be it a situation, may be you are having some medical emergency. You wish someone will lend you money and you will repay it back gradually. This often happens with all of us, maybe that is the reason banks came up with the concept of ‘credit cards’. Let us look advantages and disadvantages of credit cards, how credit card works and gain better understanding.
What is Credit Card?
A credit card is a card resembling your ATM card; it allows you to borrow money from bank to shop. It is not restricted to what purchase you do, you can buy a car from it or pay for your groceries from it. One can repay back the borrowed money within the grace period. Generally, the grace period is of 25-30 days. Any delay above that will add up interest amount upon the borrowed money. It is useful and beneficial to you and your bank; you are buying whatever you want and in return, you need to repay back when you have money. The interest on the borrowed money is profit to the bank. Ofcourse, there are limitations in everything. One cannot just spurge and indulge the way they want. Although, the concept of credit card sounds very appealing one must have full knowledge and make wise choices.
How Credit Card Works and How To Get one:
For getting Credit card, one needs to apply in bank. The issuer bank will check for the credit history you have, an estimation of your repaying capability is carried out and accordingly one gets a card. Very often, the credit limit is decided by the bank. A person with low credit score can be refused for credit card. After receiving the card, bank sends the monthly statement to you with details of all transactions made in that month. You need to pay the amount you own by the specified due date, otherwise the interest on that amount keeps on piling up.
Advantages of Credit Card:
1. No need to carry cash:
If you have a credit card, you can anytime swipe it and shop anywhere, Carrying lots of cash is anytime risky. Credit card provides ease of use. While travelling we do not need to search for ATM.
2. Fraud protection:
Suppose you made a purchase from a company and that company is fraud then credit card companies act as a barrier and protect you from losing your hard earned money. Also in case of unauthorized usage of the card, the credit card company will know and you won’t be losing money, which in case of debit card you are definitely going to lose. It is better to take precaution before the money is gone, rather than fighting it to get it back after you being duped.
3. Expense tracker:
One can ask for yearlong statements at once and figure out where they have spent the most. They could plan what changes one needs to make in their spending habits. It also helps in record keeping and calculation while paying taxes.
4. Positive credit rating:
Appropriate use of credit card helps you built credit score, and ultimately reflects positively on future bank transactions and services
5. Helps in larger purchase:
If you want to buy a TV or a vehicle but cannot afford to buy in one go, credit card helps you to buy it at once and then repay back in smaller chunks. It does not put burden on your monthly expenses.
6. Additional benefits:
Credit card companies give special discounts on flights and other purchases, if you are making frequent transactions from credit card and paying it on time. These are called as reward cards. One can get discounts on purchases like flights, gas, retail etc.
Disadvantages of Credit Card:
One could find the concept of credit card sound very interesting but it does have disadvantages too.
Having a credit card and using it wisely is extremely difficult. It is as difficult as a situation where you have chocolate cake in front of a kid and he is not allowed to eat more than one piece. One could easily get into a huge debt if he spends without giving any second thought. Credit card is not advised to a person with poor self-control, one who is already with bad debt or with huge responsibilities coming his way.
2. Frequent checks on receipt:
Many times a person is charged extra, to ensure you are not charged unnecessarily for anything, one needs to keep a keen eye on the receipts generated to you. Make sure right installments and the said interest are levied on you. A small change on one transaction can sum up to be a large amount if you consider a yearlong transactions.
3. Heavy price to pay for missed payments:
It can happen that due to sudden crunch in your finances you are unable to repay back. Inspite of your careful planning there is always a chance of something going wrong. Missed payments will increase the interest and you end up paying a lot more. I remember a scenario where a person missed a payment for a year as he altogether forgot about the debt he had for that card. He relocated and mail didn’t reach him too, due to some lack of communication he was not informed. A purchase of mere thousands swelled up to lakhs as he was unaware about it. Imagine the shock he might have received.
4. Tricky business:
Credit cards come with an annual fee; it is something people often forget, but people how you think bank affords to give these temporary loans to you from time to time. Often the annual fee along with the interest rates add up to be very costly than you imagined it to be. The savings and the benefits can be gained from other options too. One needs to analyze the affordability factor very well.
5. Additional Burden on your debts:
It is wise to have extra money at your disposal, the payout and the monthly expenses will make your pockets empty by the end of the month and again you will be required to use credit card, the cycle will be unending and one will always be in stress.
6. Introductory offers:
Banks lure the customers by providing them various introductory offers, very often the benefits are for few months, one gets used to credit card and feels he could manage it well, but when the rates return to normal you are taken aback. Also once you are habituated to it, it is a hard habit to let go off.
Expenses You Should Not Pay Using Credit Card:
Credit card could be used to pay off for any goods and services but there are few things you should avoid credit card for your own good, to name them are as under:
The rate of interest on your mortgage is much lower than you would be paying on to repay the interest on your credit card, procrastinating the payment and shifting it from one card to other will put you under lot of financial burden in the end.
b. Education Loan:
Banks offer much affordable and easy payout options for education loan, it is named education loan as it is customized for the suitability of students. Paying college fee with credit card will make your education expensive in the long run.
c. Medical bills:
If one doesn’t have health insurance, paying medical bills can be a challenge. One is often tempted to pay it off with credit card, but the interest of 10, 20 or 30 % will pile up and cost a lot. Instead, you could try to pay at once and see if you could get any discount.
If you are having a big tax bill and you are paying it through credit card, it is a huge mistake and it’s gonna add extra expense, we certainly do not want that, do we? Already taxes are too much to pay, moreover with credit card you will have to pay 2 to 3 % of what you owe to the tax service provider.
It is suggested to evaluate which interest rate is easier to pay; plastic money is not always the solution. You may buy yourself some time but the cost for it is way too much to afford.
Tips For Using Credit Card Effectively:
Credit card is great tool if used carefully. If you are repaying on time you are fine otherwise the accumulated interest will dig a big hole in your pocket, here are few things to keep in mind to avoid common mistakes.
a. Paying balance every month:
Always keep tab on how much you are spending, it is necessary to make sure you are able to pay the interest by the end of the month. Try repaying back without paying interest. You could reap the maximum benefits by that.
b. Paying as much as you can:
It is always wise to pay maximum debt you can, as you do not want interest piling up. The earlier you pay the debt, the easier it is for you.
c. Resist indulgences:
Unnecessary shopping and later regretting it is of no use. Make sure you use the credit card for needs only. One could want many things but need only few. Rather it is a good practice to use it in case of emergencies and while making larger purchase. Have a good control on oneself and be saved from the tension of debt burden. Always remind yourself that it is a temporary loan you are getting which has to be paid on time.
d. Use as a budgeting tool:
Who needs extra app and constant entries to be put when you have monthly statement mailed to you every month, if you pay your bills and other expenses with credit card, you can evaluate your spendings when you receive the statement, thereby making your work easy and making your card put to use in multiple ways. Budgeting can make way for higher savings. Unnecessary expenses are avoided when you keep an eye on it.
e. Use reward cards:
Take advantage of reward cards, credit card companies pay rewards and discounts on flights, retail and gas. If you are paying on time, you are sure to get this benefit, do not be ignorant call your bank and get the change done to reap the benefits.
f. Setting credit limit for oneself:
We humans easily lose control; Girls are attracted to shopping and boys to games. It is wise to keep a tab on oneself by setting 30% of credit limit. Which means if you can pay of 10,000 Rs, make sure you are not spending anything above 3000 with your credit card? This applies if you are using only one credit card. The credit limit set is for all credit cards put together. Also it is not advisable to have many cards, as you will be constantly being calculating or worse will be forgetting to calculate and end up losing lots of money.
g. Not to withdraw cash:
One can also withdraw cash with credit card, but it’s advised not to do so as the fee and rate of interest for cash withdrawal is high. In addition, there is no grace period for cash withdrawals hence the interest is bound to be levied on you.
h. Reaching out to own bank:
It is not necessary to get credit card from your own bank, one can always explore but your bank may provide you good benefits, as they know you have a good financial record. Before opting for other banks, there is no harm in checking it with your own bank.
Credit cards can be convenient and hassle free way to pay for all the things and services you could purchase. Exploring the market and choosing a best suitable card is necessary. One must take his lifestyle and repaying capability under consideration. It can be a blessing or a curse; it all depends on how well you use it. Be informed on all the things and the hidden charges and especially pay on time. By doing this one will surely be glad to own this magical card.