What Is A Credit Card? Pros, Cons, and Best Ways To Use

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HDFC Diners Club Credit Card

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

  1. 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.
  2. 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.
  3. 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.
  4. 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

  1. 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.
  2. 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.
  3. 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.
  4. 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.

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