Advantages and Disadvantages of credit card
We’ll examine the advantages and disadvantages of using a credit card in this post.
Due to their simplicity of use and practical pay-back choices, credit cards have become a necessary part of our life. A credit card offers discounts, offers, and deals that are unsurpassed by any other financial goods and are a gold mine for the savvy user. However, if used improperly or if you charge more than you can afford to pay back when the bill arrives, credit cards can turn into debt traps.
Here is a list of the advantages and disadvantages of your tiny plastic card if you are new to the world of credit.
Advantages of Credit Cards
1. Simple Credit Access
The ability to easily access credit is a credit card’s primary benefit. You can use a credit card now and pay for your purchases later since credit cards operate on a deferred payment basis. Every time you swipe, no money is taken out of your account, thus your bank balance is not diminished.
2. Building a line of credit
You have the option to increase your credit line with credit cards. This is crucial because it enables banks to see your active credit history depending on how you use and repay your cards. Your credit card is crucial for any future loan or rental application since banks and other financial institutions frequently use credit card usage to assess a potential loan applicant’s creditworthiness.
3. The EMI facility
You can choose to use your credit card as a means of deferring payment if you intend to make a sizable purchase but don’t want to use all of your funds on it. Additionally, if you want to avoid paying for your item all at once and depleting your bank account, you can decide to pay for it in equal monthly installments. To pay for a product, such a television or an expensive refrigerator, through EMI is more affordable than taking out a personal loan.
4. Flexible credit
When using a credit card, you may have access to an interest-free period during which no interest is applied to any outstanding balances. If you pay off the entire debt due by the credit card bill due date, you can obtain free, short-term credit for periods of 45 to 60 days. Because of this, you can receive the benefits of a credit advance without having to pay the fees associated with having an unpaid balance on your credit card.
5. Expenditure history
With a complete list included in your monthly credit card statement, a credit card keeps track of every purchase made using the card. This can be used to keep track of your spending and purchases and might be helpful for tax purposes or for creating a budget.
6. Incentives and offers
Most credit cards come packed with offers and incentives to use your card. These range from cash back to rewards point accumulation each time you swipe your card, which can later be redeemed as air miles or used towards paying your outstanding card dues. Lenders also offer discounts on purchases made through a credit card, such as on flight tickets, holidays or large purchases, helping you save.
Disadvantages of credit cards
1. Minimum due trap
The minimum due amount that is shown at the top of a bill statement is the largest drawback of using a credit card. Many credit card users are tricked into believing the minimum payment is the full amount they must make, when in reality, it is the least amount the corporation requires you to make in order to keep obtaining credit facilities.
This results in customers assuming their bill is low and spending even more, accruing interest on their outstanding, which could build up to a large and unmanageable sum over time.
2. Hidden fees
Credit cards feature a multitude of hidden fees that can significantly increase the entire cost, despite their first appearance of being easy and straightforward. Taxes and costs associated with credit cards include late payment fees, membership fees, renewal fees, and processing fees. Your credit score and future credit prospects would suffer if you missed a card payment or made multiple late payments, which might potentially result in a reduction in your credit limit.
3. Simple to overuse
Since your bank balance is constant when you have revolving credit, you could be tempted to charge all of your purchases to avoid realizing how much you owe. This can cause you to spend more than you can afford to pay back, starting a cycle of debt with high interest rates on your subsequent payments.
4. A high rate of interest
If your billing due date passes without your paying your balance in full, the amount is carried forward and interest is added to it. On purchases made after the interest-free period, this interest accumulates over time. The average interest rate on a credit card is 3 percent every month, or 36 percent per annum, which is quite high.
5. Credit card theft
You could become a victim of credit card fraud, despite the fact that it is not particularly widespread. With the development of technology, it is now easy to copy a card and access private data, allowing another person or organization to use your card for purchases. If you see any purchases on your statements that seem questionable, carefully examine them, and report them to the bank right away. If the fraud is established, banks typically waive charges, so you won’t be responsible for any purchases made by the thief.
How to properly use your credit card
Keep in mind the following advice to prevent being in debt as a result of reckless credit card use:
- So that you are aware of all the fees and terms that apply to your card, read the fine print.
- Spend only what you can afford to repay.
- To keep track of your expenditures, avoid charging daily items to your card.
- Regularly monitor your credit limit, and when it has been exceeded by 40%, stop using credit altogether.
- To prevent paying interest on balances that are still owed on your card, select the EMI option when making major purchases.
- Always reserve at least 40% of your credit limit for unexpected expenses.
- Plan your purchases and just make them with your card. Keep impulse purchases off of your credit card.
- To prevent paying interest, aim to always pay off your credit card balance in full each month.
- Never forget to use your card because doing so will result in greater fees and a severe penalty.
- If you overspent on your card, contact the bank. To prevent further debt accumulation, they might be able to assist you in creating a repayment strategy with a set interest rate.
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