What Is A Credit Card?
A credit card enables a credit card holder to spend money or make credit purchases. A credit cardholder must pay any outstanding amount and interest on their credit card. It enables a holder to buy now and pay later. A credit card holder will have a credit limit based on their income, credit score, etc.
Pros Of A Credit Card
- Immediate Access to Credit – having a credit card enables you to have easy and immediate access to credit. This could be for an emergency, to make a purchase, pay fees, etc. It also helps to have a credit card if you have unexpected expenditures and/or a fluctuating income.
- Access to Future Loans – If you apply for a credit card and use it wisely, make payments on time, always under the credit limit, etc. then you can avail a loan in the future. Your credit score is based on how you make your credit payments and other factors. With a good credit score, you will have access to loans and reasonable rates of interest.
- Benefits and Perks – credit cards come with several perks and benefits. Benefits such as points, rewards, cash back, air miles, lounge access, golf access, flight tickets, movie tickets, etc.
- Safety and Protection Against Fraud – credit cards are easy to carry, safer than cash and have better fraud protection than debit cards.
Cons Of A Credit Card
- A High Rate of Interest – credit cards come with a very high-interest rate (40-50% per annum, generally). If you skip a single payment, then you will be charged interest on the amount due. A high rate of interest and prolonged delay/failure to pay the balance will lead to the credit card holder declaring bankruptcy or falling into a debt trap.
- Fees and Taxes – credit card transactions come with fees and taxes as applicable. Some of these fees include joining fees, renewal fees, processing fees, late payment fees, GST, etc.
- Overspending – You know you overspend if you owe more than you can pay. Having a credit card enables a holder to spend even when they may not have the money to pay. Thus, overspending leads to a debt cycle and very high-interest rates on future credit.
- Negative Credit Score – If a credit card holder does not use his/her card wisely, this can lead to a negative credit score. Having a bad credit score will make it really hard to get a loan or credit in the future.
What Are The Best Ways To Use A Credit Card?
The best ways to use a credit card in India are:
- First, read the terms and conditions before selecting a credit card provider.
- Ensure that you can pay back the amount you spend on your credit card.
- Don’t use your credit card for small or everyday purchases. This enables you to keep a track of your debt.
- Try not to cross more than 45% of your available credit limit. Keep another 40% of your credit limit for emergencies.
- Don’t make cash withdrawals on your credit card unless you want to pay interest on those withdrawals.
- Make payments on time. If you fail to pay on time, you will have to pay a fine and take a hit on your credit score. Pay your credit card bill every month to avoid paying additional interest.
- If you can’t pay back your credit due, then the bank will help out. It’s usually a payback plan at a fixed interest rate.
- EMI payments are the best option for expensive or high billing purchases. Directly billing it on a credit card attract interest payments.