All about Credit Card usage
We all have a love-hate relationship with our credit cards. If you go by the money management advice, credit-card credit is a big No! But let’s be honest. We can’t live without our credit card. Can we? So, let’s find out what is the best way to use our credit cards.
Why do financial advisers ask you to destroy and throw your credit card in the trash bin? Why is it considered to be so bad? Simply because, at the end of the day, credit card credit is a loan that needs to be repaid, failing that might ring in uncalled and ugly for repercussions.
Having said that credit cards come with the kind of convenience and purchase power that is hard to resist. At times, credit cards prove to be our saviours as well. When the worldly-wise say – ‘cut the cloth as per your need,’ credit cards empower you to spread your wings. And if you can treat your credit card with due respect and make your credit payment on time, you can even win a friend for life. So, let’s understand the pros and cons of using a credit card.
What is a Credit Card?
A credit card is a plastic money that you can use to purchase any item or service on credit. The difference between credit card and debit card is that debit cards give you access to the money that you have in your bank account, while credit card gives you access to an amount that is not in your bank at the moment. It offers you a credit and a cash limit that you can use whenever you need and pay off within the due date for the same.
Advantages of Having a Credit Card
Your credit card can be a true friend in need. Let’s see how-
Credit cards were first introduced by New York’s Franklin National Bank in 1951. It made its way to India in 1981 when it was introduced by the Andhra Bank. And with that came the convenience and safety of shopping and making transactions anywhere and everywhere without the hassle of carrying cash. Almost all organised retailers had card swiping machines. And not just that, credit cards facilitate the user to make purchases through phone or computers as well. The entire constraint related to cash and the risk of pick-pockets were mitigated. The wallets felt lighter while the card users felt wealthier.
Spend Now and Pay Later
Every credit card gives you an interest-free loan for 45 days. Only when you fail to make the payment by that due date is when you have to pay high interest. This facility often proves to be a saviour in the time of emergencies when you can avail of something when you need it even if you might not have the money for it at that moment.
Cash withdrawal facility
You have nothing to worry about even when you run out of cash in your bank account. Your salary got over before your next pay-cheque got cleared? But you still have money to spend. And that’s only possible because of credit cards.
Reward points and Attractive discounts
Most credit cards have tie-ups with other brands and retailers that facilitate lucrative discounts, money back facilities, and reward points. You can earn miles, gift cards, other merchandise, or even cash. Many retailers offer even interest-free EMIs on credit card purchases at the time of big sale, thus giving access to many aspirational brands that seem to be unaffordable otherwise. Credit card users can plan their expenses accordingly.
Handle Billing Disputes
Credit cards have made transactions quite safe and secure in general. The best part is that you receive an alert on your mobile and your email id as soon as you make a transaction. Hence, even if you lose the receipts, you can still address your billing concerns with the retailer if such a need arises.
Dis-advantages of having a Credit Card
Like we already mentioned that our credit card is a true friend in need. However, at times, our misconduct can turn our friends to become our worst foe. And here is how it can even make us fall apart-
The illusion of Wealth that we Don’t Have
Why people ask you to stay away from credit cards is because if you are not extremely disciplined with your finances, credit cards can slowly increase your loan burden. It gives you an illusion that you have money to spend when you don’t have it.
You tend to make an assessment based on your future cash flow and make the expense. But seriously, who has seen tomorrow? For example, the recent COVID 19 pandemic has been the best learning lesson in this regard. This time, since the impact is global, moratoriums for loans and credit payment have been sanctioned. But if some emergency occurs at a personal level and we fail to make the payment on the scheduled time, it will only add to our miseries.
Increasing credit card debt
As per a news report, the total credit card outstanding in India at the end of May 2016 was an alarming Rs. 42,100 crore. That is the real reason to be worried. When you get into spending based on the money you don’t have in reality, your spending habits tend to go haywire. It becomes increasingly difficult to maintain a disciplined spending and repaying routine.
Penalty and exorbitant interest rate for late payments
Your credit card is your friend, but only as long as you are disciplined. However, if you falter in making the credit card bill payment on time, it will not cease to penalise you. There is absolutely no scope for negotiation.
Ideally, one should try to pay the entire amount when your credit-free period ends. However, there is a minimum due that amounts to 5 percent of the total bill amount. It is the revolving credit facility that is allowed by the lender. However, if you choose to pay only the minimum due, interest will be levied on the outstanding amount at 3-4% per month.
The interest applicable to credit cards is much higher at 3-4% as compared to personal loans that are between 1.2-2.5%.
Charges on Cash Withdrawal
Credit card users are advised against ATM withdrawals through credit cards as it comes at the cost of a cash advance fee of about 3.5% of the amount withdrawn apart from the interest that is applied right from the day of money withdrawal to the day of repayment. There is no credit-free period for cash withdrawals.
You are making an expenditure before you have even received your pay-cheque. Hence, the moment you receive your income, part of it is already gone. The more you swipe your credit card, the number of debt increases, and after a point of time, it becomes difficult to pay. On top of that, many credit card users tend to make the minimum payment while they keep swiping their cards. It leads them to a crippling debt that makes it difficult for them to come out.
Impact on Credit Record
We are lucky to live in a time when we can avail of financial assistance so easily. We can avail them at the time of our need, to buy a house, car, or to pursue higher education. The only prerequisite for that is to maintain a good track record of loan repayment. Continual delay in payment or inability to repay the credit card mars your credit record that might come in the way when you need financing for some emergency in the future.
The Best Way to Use a Credit Card
Like we have said before, a credit card is a friend for life unless you start misusing it. Managing your income, expenditure, and savings efficiently is all about discipline and diligence.
Ideally, you should use your credit card to avail of the discounts and gather rewards points. Use them at the time of emergencies or unexpected expenses. But you should borrow as much as you can pay off. Paying your credit card payments on time will help you get a good credit score that can help you get loans in the future.
Make sure to choose the best credit card in India with the least or no upfront charges. And always make sure to compare and evaluate all the terms and conditions. Limit your credit cards to a maximum of two cards at a time. And you are sure to spend happily ever after!
Q. What are the eligibility criteria for applying for a Credit Card?
A. To apply for a credit card, the applicant should be at least 18 years of age, either self- employed or salaried and should also qualify the minimum income requirement, should have a savings account in the bank and should be able to provide a valid address proof.
Q. What are VISA and Mastercards?
A. VISA and Mastercards enable international transactions across 200 countries and territories. These companies use global payment technologies to enable exchange of digital currencies instead of cash, drafts or cheques.
Q. What is the EMV chip?
A. EMV stands for Europay, Mastercard and VISA. It is the latest technology that comes with a chip as well as a pin. Both the chip and the pin need to be used to complete a transaction. This ensures an extra level of protection to the card users.
Q. What is a CVV number?
A. CVV number is the three digit number at the back of the credit card that is used for the verification process at the time of online transaction. This number should never be shared with anyone.