Advantages And Disadvantages Of Credit Cards

Let’s take a quick look at the advantages and disadvantages of credit cards.

ADVANTAGES

The major benefit of a credit card is that the individual using it does not require ready cash to make payments for various purchases. Several other important benefits are listed out in details below.

No immediate cash

No immediate cash is required for several expenses when a person has a credit card. This will ensure that the person does not have to carry the money with him/her at the time of making the expense. The no immediate cash option helps settle the amount of the credit card bill by the consumers at their convenience using the various options given for payment.

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Free credit

Free credit is the advantage that sets credit cards apart from other types of borrowings. Most of the borrowings by an individual whether short term or long term come with a cost in the form of interest. As long as a person pays within the credit period the amount spent using a credit card, there will be no interest charge to be paid, which means free credit for the cardholder. However, one has to be alert in using the credit because any slip-up can lead to a position where he/she needs to pay a heavy charge.

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Worldwide usage

The best thing about a credit card is that there is no restriction about the time and place of its use. A credit card can be used in any city; more importantly, when traveling abroad it frees a person from having to keep foreign currency with them. This is a major relief because carrying foreign currency around in a foreign land becomes a bit difficult task for any traveller. Thus, a credit card becomes very important for someone who is on a long trip across different nations or needs to travel worldwide for business.

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Tracking expense

The limit on a credit card is fixed. This means that a person knows the maximum amount that can be spent on his/her credit card. If cardholders take due care this also becomes a way in which they are able to track the expense that they make, and this can limit the amount spent by them using their credit cards. Having credit cards with a specific limit will help in achieving this objective.

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E-buying

A credit card is essential for e-buying. It means if you want to buy something over the Internet you need a credit card as most e-commerce sites allow payments only through credit cards.

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Cash withdrawal
You can use your credit card to withdraw cash from ATMs in case an urgent need arises. But remember, there is no free credit period on cash withdrawals and they attract interest from day one. Also, the interest rate on cash withdrawals is generally high. It can range from 26% to 45% annually. You will also have to pay a cash withdrawal fee of around 2% to 3% of the amount withdrawn.

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DISADVANTAGES

There are various features of a credit card that seem to be a gift for the person using the card. But a little bit of carelessness can change the entire position and the same factor can end up being a curse for the credit card user. The cost for this has to be paid in the form of higher interest and charges that make it a costly way to use funds if due care is not taken.

Interest cost

The interest that a person pays while using a credit card is the highest among all the options available in the market. Specific loans come at reasonable rates, for example, a car loan can be taken at an interest rate of 14%-15% per annum. Similarly, a personal loan where there is no restriction on the end usage is available at the rate of 18%-19% per annum but when it comes to a credit card the amount paid by a user is anything between 35%-42% depending upon the exact rate charged. This makes credit cards one of the costliest ways of borrowing, and hence one has to be extra vigilant in trying to avoid this high cost.

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Charges

The payments made by a credit card user do not end with interest charges because there are a lot of other payments that might be required to be paid on the credit card. This is mainly in the form of penalties and charges. For example, inability to pay the required amount of the credit card in time can lead to a late payment charge that can be anything between Rs 300-Rs 500. Similarly, making expense over the credit limit might be permitted by the credit card company but this comes at a hefty price in the form of a high charge. All these can add up to a significant figure, increasing the overall cost of using the credit card.

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Credit trap

Things are great as far as the usage of the credit card is concerned when things are under control. In such a position, there can be no charge and no interest payment but the moment one falls into the revolving cycle there are a whole lot of factors that impact the person at the same time. For example, the moment one full payment is missed every single expense is covered by the interest rate and no credit period is available. Similarly, more and more usage of credit cards is encouraged which often makes the payback a difficult task for the user.

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Multiple credit cards

The other disadvantage is that people accumulate more and more credit cards as these are issued very easily by banks. This makes the problem of managing multiple credit cards a very difficult task. Remembering the payment dates and amounts for each one along with the other requirements often become a tough task leading to missing out on some occasions. This can result in a large amount of charges coming in which is an additional cost. Using multiple credit cards also leads to lower control over the overall finances because of the large amount of borrowings that pile up.

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Overspending

A credit card is the worst enemy of impulsive buyers. A credit card user is always liable to develop a tendency of overspending. For example, if your salary is Rs 50,000 and the credit limit on your card is Rs 1,00,000, it doesn’t mean that you can afford to spend Rs 1,50,000. The additional Rs 1,00,000 is just a loan facility provided, and as all loans are repaid this one too needs to be paid off.