Credit Card is a very fancy business. It has benefits for all the parties involved for a successful payment transaction, whether it is Payment Network or Issuer bank or Acquiring bank or the cardholders. These benefits could be direct benefits or indirect benefits. To know more about, how the credit card business works and generating huge profit for the credit card companies and banks; you read my previous article on Credit Card Business Model.
If you’re out shopping, it may be more convenient to carry a credit card to pay for your purchases than it is to carry cash or your checkbook. But that convenience comes at a price. There is commonly three types of cards popular in the market Credit Card, Debit Card and ATM Card and each has its own advantages and disadvantage. In this article, I have tried to explain the Advantages and Disadvantages of using a credit card.
Advantages of using Credit Card
1. Purchase Power and Convenience to use
You don’t need to carry cash or chequebook when you go shopping. Credit cards can make life easier for all kind of shopping and it gives more purchasing power to the customers. The credit card is nothing but bank’s credit to you without interest for 50 days, therefore even you don’t have money in the bank for a current month, you can still buy the stuff you desire and pay later (by the bill due date.).
Credit cards are accepted almost everywhere. You can use your card to pay for your groceries, fix your car, pay your tax bill, or handle the co-payment at the doctor’s office. They are pretty much required for online purchases.
2. Building a Good Credit Score
The credit score is a measure of how creditworthy you are i.e. how likely you are going to pay the money back on the time when you borrow it. Maintaining a good credit score history is very important, not only when applying for credit cards, but also when applying for a home or personal loans, rental applications, or even some jobs.
The higher the credit score is, the more eager lenders are to make loans to you at favorable rates. Having a credit card and using it wisely (making payments on time and in full each month) will help you build a good credit score history. Better credit score history will help you to get the loans at an attractive interest rate. Sometimes, credit card companies provide special credit cards with more offers.
3. Support in Emergencies
As we know, using a credit card means, taking credit from the bank which needs to be paid before the credit card bill due date and generally you have 50 days of time to replay your expenses. You can still use a credit card when you don’t have money in your bank.
Therefore, credit cards can also be useful in times of emergency such as your car breaking down or flood or fire which may lead to a large purchase like the need for a rental car or a motel room for several nights. If you get hit with an unexpected expense, credit cards can be the quick and easy solution you need and you don’t need to run to people and ask money.
4. Credit Card Rewards
Most of the credit cards offer additional benefits, such as discounts from particular merchandises or companies, bonuses such as free airline miles or travel discounts, and special insurances (like travel or life insurance.). Some credit cards offer rewards points which could be converted into the cash back, airline miles, shopping vouchers, etc.
If you are frequent credit card user and do all purchase using a credit card, then you might make good saving and accumulate good reward points which later could be converted to cash back or to get shopping vouchers. However, these rewards are introduced to encourage you to shop more using the credit card.
5. Expense Trackability:
The credit card bill lists all the purchases you made during the month, with their amounts, so you always know exactly where your money is going. This information can be very handy for creating a budget, or for making sure you’re sticking to the one you already have.
This electronic way of recordkeeping that comes with credit cards makes it easy to track your spending and identify fraud.
Disadvantages of using Credit Card
1. Blowing Your Budget by Overspending
Credit cards can make life easier, but they can also make overspending easier as well. The biggest disadvantage of credit cards is that they encourage people to spend money that they don’t have.
Most credit cards do not require you to pay off your balance each month, so even if you only have $100, you may be able to spend up to $500 or $1,000 on your credit card. If you charge every purchase you make and don’t pay off your total balance at the end of the month, you may soon discover yourself overwhelmed with debt.
With interest charges adding to the burden, you could find it difficult to carry the load you’ve shouldered.
2. High-Interest Rates and Increased Debt
Using credit are essentially borrowing. And you’re not borrowing for free. Mismanaging a credit card can lead not only to a high balance, or maxed-out card but also to debt in the form of interest and fees. Credit card companies charge you an enormous amount of interest on each balance that you don’t pay off at the end of each month.
If you have a $100 in savings, most banks will give you at the most 2.0 to 2.5% interest on your money over the course of the year. This means you earn $2.00 – $2.50 a year on your $100 savings.
Most credit cards charge you up to 10 times that amount of interest on balances. This means that if you have $100 balance that you don’t pay off, you will be charged 20-25% interest on that $100. This means that you owe almost $30 interest (plus the original $100) at the end of the year.
If you carry a balance on your credit card from month to month, it can be very easy for charges and interest to rack up. Many people don’t expect credit cards to be gateways to extra debt, but if you’re not careful, that’s exactly what happens.
3. Credit Card Frauds
The credit card provides the cashless transaction and we go out shopping and swiping our card on various point of sale terminals, online sites, etc. Apart from all these good things, it comes with dangers. Like cash, sometimes credit cards can be stolen. A credit card could be stolen, numbers could be copied by hackers using various advanced hacking tools. Once your credit card hacked, it could be used to steal your money quickly.
You must do the following if you lose your credit card:
- If you lose your card or wallet, report it to your credit card company immediately.
- Don’t loan your credit card to anyone and only give out your credit card information to trusted companies or Web sites.
- Check your statement closely at the end of each month to make sure all charges are yours.
I hope, now the advantages and disadvantages of using a credit card are clear. But we must also know the tricks or guide to avoid financial loses, therefore below I have tried to explain the best practices you must follow to avoid the financial loses due to careless use of credit card.
Best practices for using Credit Card
Credit cards can make life easier and it comes with a lot of benefits for the cardholders. But, if they aren’t used wisely they can become a huge financial burden. Therefore credit cards are best enjoyed when cards are used responsibly.
Following are the simple rule to use the credit card wisely:
- Keep track of your purchase by checking your credit card monthly statement regularly. It will help you to identify the unwanted expenses and could keep you away from the overspending.
- Read all the terms and fees associated with your card before singing for the credit card. This will keep you away from the hidden charges.
- Don’t just run swiping credit card for stuff you don’t need or something expensive which you can’t afford. This will result in a huge monthly bill which you might not be able to pay. A good rule of thumb for using credit cards responsibly is not to use them for impulse purchases or unaffordable items if you cannot pay it off within a reasonable amount of time.
- Pay your credit card bill on a timely basis i.e. before the credit card monthly statement due date. It will help you to avoid the late payment penalty.
- Don’t loan your credit or give out your credit card information to anyone but reliable companies. Do not save your credit card information on unsafe shopping websites.
- Try to avoid the credit card loan until and unless there is no other way. These loans may look cheap sometimes but most of the times cardholders ended up paying more interest/charges.
I hope you liked this article on the advantages and disadvantages of using a credit card. It might help you to choose the right credit card and keep you away from the disadvantages of credit cards. Consider sharing this article with your friends and families and let them aware because sharing is caring.
Thank you all for reading this article and God bless you all.