Credit cards in India have become a status symbol. A lot of people equate having a credit card to being wealthy. This has resulted in users getting credit cards just for the FOMO associated with it. A dangerous trend of relying on debt for day-to-day expenses is on the rise.
According to a report from RBI, on average, credit card users spend 21X more than debit card users in India.
To put this into perspective, while an average debit card user spends only ₹700 per month on a single card, an average credit card user spends about ₹14,500 for the same duration. This difference in spending is alarming.
This is because of the lucrative buy now, pay later scheme that credit cards offer. Even though most credit cards have an annual ₹500 service charge along with multiple penalty fees, their popularity has never been higher. And from the global data, we have seen a pattern of excessive usage of credit cards creating a population that is constantly in debt.
In the US, the average credit card debt is at an all-time high. This has increased average household debts significantly. With the rise in prices and interest rates, people are finding it more difficult to pay back these debts on a timely basis and are forced to pay interest almost every month.
Therefore, it is very important to have all the necessary information and consider various important factors before deciding to get a credit card. In this article, we have discussed in-depth the advantages and disadvantages of credit cards to help me make an informed decision.
What are credit cards?
Unlike debit cards, where you use the money present in your bank account to make transactions, credit cards use the bank/credit card provider’s money to make transactions. This means that every time you make a transaction using a credit card, you are taking a personal loan from the bank/credit card provider and you are liable to pay the loan back along with interest.
The main reason people use credit cards is convenience. Credit cards, when used correctly can be a very convenient mode of payment and as long as you are paying them back on time, the interest will not be an issue.
This credit limit will be decided by your credit card provider considering various factors such as your income, credit score, spending requirements, etc.
Does that mean you can use unlimited money as long as you are paying it back on time?
Well, no. Your credit card will come with a credit limit i.e. the maximum amount of credit you can use in a month. If you exceed that you will have to pay extra charges and penalties.
Can you withdraw cash through a credit card?
Technically you can. But there is a cash withdrawal fee of 2.5% to 3% of the amount withdrawn. Your credit card provider might also charge an extra fee for regular cash withdrawal.
This is why cash withdrawal using a credit card is discouraged.
Can I have multiple credit cards at the same time?
Yes, you can have multiple credit cards at the same time. But it is highly advisable not to do so if you have never had a credit card before. If you are just starting or have had a credit card but have not used it much, then it is suggested that you stick to one so that you don’t get overwhelmed by the amount to be paid back each month.
Each credit card provider will also have different terms and conditions. This means you have to keep track of all that information to not cause any damage to your finances. Therefore, it is suggested that you stick to one for some time until you are used to the idea and process of using a credit card.
Benefits Of Using A Credit Card
The reason people use credit cards regularly is that it can be very beneficial to you if you use them wisely. Here are some reasons to use a credit card:
1. Better Credit Score:
This is one of the most important reasons for using a credit card. If you use a credit card and pay off the money regularly, it will positively affect your credit score*. And this credit score can affect you favorably in the future when you want to take a loan from the bank.
*Note: A credit score is a rating through which banks & other financial institutions judge whether you are reliable enough to pay back your loans & interest on time. People with higher credit scores tend to get better offers and deals on their borrowings.
2. Cashbacks, Rewards & Benefits:
Many credit cards give you 2X rewards, benefits, or sometimes even cashback on your spending. These rewards vary from one provider to another. These make it very attractive for users to use their credit cards to make purchases. Retailers also have special benefits for credit card purchases. These rewards can then be redeemed for travel bookings, shopping vouchers & gift cards.
3. Safety:
While safety is not the first thing that comes to mind while talking about a credit card, it is a very important benefit. Typically, in case of theft & fraud, the money will be reimbursed by the credit card provider. This means that the money is not going out of your pocket. However, all kinds of thefts and frauds are not covered in this. Only certain types of frauds can be reimbursed up to a certain limit.
Nonetheless, you have limited liability in these kinds of fraud/theft cases. You need to follow appropriate procedures and inform the provider about the fraudulent activities and they will deal with it. Your finances will not get heavily affected in these cases as it’s not your money.
On the other hand, if any theft or fraud happens to your debit card, the money is going from your pocket and you need to run after the authorities to retrieve it back. It might also disrupt your personal finance as you might not be able to pay certain bills due to a lack of funds.
Now, let’s understand why you should be careful & sometimes wary while using a credit card.
Cons Of Using A Credit Card
1. High-Interest Rate:
Credit cards are notorious for charging a very high-interest rate for any default in payment. While the interest rate differs from one provider to another, the average interest rate can be 3% per month which is 36% per annum. This can cause a significant setback to your savings if you miss a couple of payments a year even.
2. Hidden Costs & Fees:
Other than charging an annual fee for credit services, most providers also have many hidden charges & penalties that a user might not know off. These charges can accumulate over time and negatively affect your finances. Therefore it is very important to read the fine print while getting a credit card.
3. Risk Of Low Credit Score:
This is one of the main disadvantages of using a credit card. Any default on the payment will not only require you to pay interest & penalties but also negatively affect your credit score. This can be very dangerous because if your credit score is low you might not be eligible for future loans and it takes a significant amount of time & effort to bring your credit score up.
4. Risky Spending Habits:
There is a mythical belief when it comes to credit cards that it is somehow free money. Since the money being used initially is not out of your pocket, it is easy to spend beyond your means. But this can cause a dangerous pattern where you always have to be in debt for your irresponsible spending habits.
5. Extreme Discipline Needed:
When it comes to credit cards you cannot afford to be careless at all. Credit cards require extreme discipline and careful usage. You have to be vigilant about the transactions taking place from your card to ensure that all the transactions are correct & made by you. You also have to always ensure that you have read every minute detail of the terms & conditions of the credit card. And of course, it is vital that all the payments are done in time to avoid pesky interests and penalties.
So, should I use a credit card or not?
There is no simple answer to this. If you are confident about your ability to keep yourself accountable & responsibly pay off all the payments without missing them, then yes you should use a credit card.
But if there is any doubt in terms of whether you can pay off your credit card at the right time without fail every single month, then it is better to not use them. You should also consider your past financial behavior. Have you been financially conscious and disciplined in the past? If yes, then credit cards might be beneficial for you but if you tend to make risky financial choices then this should be a hard pass for you.
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