Advantages and Disadvantages of credit cards

Trying to figure out what are the credit card benefits but unsure of the risks of using them? Don’t know how to get one? Today we shall try to answer these questions for you.

Do you know a lot of your friends, who use credit cards for shopping, dining, booking air tickets, buying movie tickets and you also want to start using credit cards? Trying to figure out what are the credit card benefits but unsure of the risks of using them? Don’t know how to get one? Today we shall try to answer these questions for you.

In this article we will cover some commonly asked questions like:

– What are the advantages of using a credit card?
– What are the disadvantages of credit cards?
– How to get a credit card?
– What are the types of credit cards?
– Who issues Credit cards?

But first of all let us see, “What are credit cards and how do they work?”

As the name suggests, Credit card is a payment card with which you pay on credit. It is based on the philosophy,” Buy now, pay later”. A credit card is issued by financial institutions, generally banks, to customers to borrow money from the bank up to a certain limit in order to withdraw cash or pay a merchant for goods and services.

They are issued based on the cardholder’s accrued debt, that is, the promise of the cardholder to pay the debt back with interest. Using a credit card is equivalent to taking short- term loans from the bank, which is different from using a  debit card. A debit card is also a payment card, issued by banks to customers, but payments are made by deducting money from their checking or saving accounts every time they swipe the card.

There are different types of credit cards available in India, like lifestyle credit cards, shopping credit cards, fuel credit cards, rewards credit cards, travel credit cards and many others.

Which banks in India issue credit cards? 

Almost every major bank in India like SBI, HDFC, ICICI, HSBC and others issue credit cards to its customers. These banks subscribe to a credit card payment network, which acts as the payment bridge between the card issuer and the merchant. There are 5 payment networks in India namely Visa, Mastercard, American Express, Rupay  and Discover, out of which Visa and Mastercard occupy the major chunk of the market.

Credit card benefits:

1. Increases purchasing power: Credit cards are easy sources of instant credit. You can pay for groceries, medicines, electronic items, cars, air tickets, movie tickets, hotel rent and any other unplanned expenses like hospital bills as long as it does not exceed the credit limit associated with the card.

2. Provides EMI facility: You can make a large purchase using your credit card and pay it off in EMI (Equated Monthly Installment) spread throughout a year or more (depending on the offers from the bank) when you don’t want to spend your savings all at once or you don’t have enough money now to pay.

3. Helps build credit score: Credit cards help the customers build a credit score, based on which banks and other money lenders evaluate the cardholder’s  creditworthiness ( or ability to repay a loan in the future) and give them future loans. Credit score is determined based on how much past credit you have taken, how long you have taken the credit for and what are your repayment habits. Even one day late repayment can reduce your credit score. Higher is the credit score, greater is your chance of getting future loans and that too of higher amounts.

4. Has multiple Rewards and offers: Almost every credit card gives you reward points on making a purchase of a certain amount ( Remember the message popping up on your phone, spend 100 rupees and get 3 reward points?).The minimum purchase amount varies from card to card. These reward points get collected in the credit card account and can be used later to avail discounts on  future purchases. There are also other offers like cash back, flyer miles, discounts on online retail sites, discounts on movie tickets, food, fuel refilling, free parking area access, free airport lounge access.The benefits offered depend on the card issuer and the type of credit card you use.

5. No interest period or grace period: Not all, but some credit cards have an interest free period or grace period,( i.e the period between the end of billing cycle and payment due date) within which, if you pay the entire due amount, you don’t have to pay any interest.

6. Allows cheap international transactions: When we travel outside India, merchants often do not accept debit cards. Credit cards (like HDFC Infinia, Yes First Preferred Credit card and others) can be used to make purchases outside India at reduced foreign currency mark up fee (below the normal fee, which is around 3.5%)

6. Enhanced security: Almost all credit cards are secured with smart(EMV) chips to secure against frauds. In case of any suspicious transaction, alerts are sent to cardholders via  a phone call, message or email and the transactions can be stopped if the cardholder refuses to acknowledge the transaction. Additionally, as per RBI mandate, any burden of proof for customer liability in case of unauthorized transaction lies with the bank, not the user.

We have seen the advantages of using a credit card, let’s talk about their disadvantages.  You can take advantage of credit card benefits to the fullest if you can  use it responsibly, otherwise it can become a debt trap for you and make you bankrupt.

Disadvantages of credit card

1. Unwanted purchase: Since credit cards work on revolving credit and you don’t have to pay anything from your bank balance, it can tempt you to overspend and make unwanted purchases, more than what you can pay.

2. A debt trap: Overspending can lead you into a cycle of debt and make you pay excessively high interest rates on future payments. It will also degrade your credit score, obstructing the way to get future loans.

3. Multiple hidden costs: Credit cards not only charge interest on the principal amount you borrow(APR), but also other charges like late payment fees,processing fees,joining fees,annual renewal fees  on the cardholders. So, even if you miss the payment deadline by one day, you will be charged a late payment fee and on repeatedly missing the deadlines, you will end up with an exceedingly high interest rate. In India, the normal APR( annualized percentage rate) of most of the credit cards is close to 40%. Hence, you should always read the terms and agreements with the bank before you think of availing credit card benefits.

Credit card advantages and disadvantages – Frequently Asked Questions(FAQs)

1.What is the credit limit?
Credit limit is the maximum amount of credit you can avail on your credit card or the maximum amount of money you can borrow using your credit card. Every credit card has different credit limits. This depends on the bank issuing the credit card. The bank decides the credit limit based on your credit history, amount of money you have after meeting all your financial obligations and whether you have other loans,mortgages.

2. How can I increase my credit limit?
Usually the bank sends you sms on your registered phone number if you are eligible for an increased credit limit offer. Otherwise you have to apply to the bank with proof of Form 16, Income tax return file and last two months salary slips.

3. What is the available credit Limit?
Available credit limit is the credit amount available for purchases as on date. Lets say, the credit limit on your card is 1,00,000 rupees, annually. You have spent 30,000 rupees. So the available credit limit as on today is 1,00,000-30,000 = 70,000 rupees.

4. What is the cash limit?
Cash limit is the amount included in the credit limit that can be withdrawn as cash.You generally have to pay interest rate from the day you withdraw cash plus a cash withdrawal fee when you withdraw cash from your credit card.So, unless it is too necessary, don’t use a credit card for cash withdrawal.

5. Which credit card should I buy?
This depends on the purpose for which you want to use the card. Every bank offers different types of credit cards for specific services. For example, If you want  to earn reward points while you shop, go to the bank website and select your preference, your income level and your monthly expenses,  the bank will recommend a credit card best suited for you.

6. Am I eligible to apply for a credit card?
You must be at least 18 years old( for some banks, it is 21 years, depending on banks), salaried or self-employed and have an account in the bank where you are applying