Thinking of Getting a Credit Card? Consider The Pros & Cons First

If you don’t use a credit card judiciously, you might fall into a debt trap.

Always consider the pros and cons before applying for a credit card.

(Photo: iStock)

In today’s world, having a credit card is considered as a status symbol rather than a financial tool that enables an individual to plan his expenses in a better way. As a result, we find every other person applying for a credit card. Now, given the benefits that credit cards offer to an individual, this comes as no surprise at all. However, if the card is not used responsibly, an individual may end up paying a lot of money in interest. With almost every bank offering credit cards to its customers, it is very important to consider the pros and cons of a credit card before availing one. Here, we take a look at those:

Advantages of having a credit card

● Enables to make expensive purchases without digging into savings: When we talk of credit cards, the first benefit that comes to mind is that it enables the individual to buy an expensive item without needing to dig into his/her savings. Having a credit card lets the individual pay for the purchase through Equated Monthly Installments (EMIs).

● Can avail lots of incentives and offers: One can avail a lot of incentives and offers on using his/her credit card. From getting cashbacks, availing discounts of purchases made or earning reward points every time the card is swiped, they stand a chance to enjoy lots of benefits. These benefits can be later redeemed as discounts on other purchases enabling individuals to save some cash.

● Offers purchase protection: Credit cards also offer protection for purchases made using them. When such purchases get lost, stolen or damaged, an individual can use the credit card statement as proof while filing a claim for the product.

● Helps in keeping a track of the expenses: Another advantage of credit cards is that an individual can use it to keep a track of the expenses. With a detailed list being sent to the individual of the monthly expenses carried out using the credit card, he/she can chalk out a budget as well as use the list to address tax issues.

● Helpful in building a line of credit: Individuals with the help of credit cards can build up a line of credit for themselves. With banks keeping a close look on one’s credit card usage, having a good credit history makes the process of availing loans a lot easier.

● Enables individuals to avail an interest-free period: With most credit cards coming with an interest-free period, an individual can avail a period between 45 to 60 days where he/she does not need to pay any interest on the outstanding credit amount.

● Allows an individual easy access to credit: Credit card also allows an individual to defer the payments for the purchases made. This enables them to prioritise their expenses as well as helps in keeping their savings intact.

You must be very judicious while using a credit card.(Photo: iStock)

Disadvantages of having a credit card

As seen above, there are a lot of advantages that an individual can avail after getting a credit card. However, it does not mean that there are no disadvantages. Just like pros, there are certain cons that needs to be considered. Some of them are as follows:

● Need to stay clear of the debt trap: When one avails a credit card, it is very important to ensure that the interest does not pile up. With banks only displaying the minimum amount on top of the credit card bill statement, individuals need to be aware of the total bill as well. The minimum due amounts to only 5% of the total outstanding bill. No interest is levied if the bill is paid in full. However, paying only the minimum due and carrying forward a balance will attract interest on the outstanding balance as well as future purchases.

● High interest rates need to be borne by the individual: The one thing with credit cards is that everything seems to be fine as long as the amount due each month is paid off in full. However, once the dues are carried forward due to unforeseen reasons, the interest charged on the amount due can be quite high. As such, the individual may end up paying a lot more than the fixed price of the item purchased with the help of their credit card.

● There are hidden costs associated with it: Apart from individuals needing to pay high interest on their purchases, credit cards comes with a lot of hidden costs. Joining fees, renewal fees, processing fees, late payment fees as well as a number of taxes can pile up the overall expenses on the credit card.

● Credit cards can be targeted by scammers: Credit cards are quite often the target of scammers. With the advent of technology, it is quite possible for others to gain access of the credit card and make purchases without the knowledge of the individual. Hence, it is imperative for credit card users to be aware of the purchases they make. The individuals can opt for SMS and email alerts to keep themselves aware of the transactions made on the card. This is also helpful in reporting fraudulent transactions.

● Hard to resist temptation of overspending: Overspending using the credit card is a common disadvantage. One who avails a credit card needs to ensure that he/she can resist the temptation of overspending as it can lead to debt traps and higher interest rates.

● Can hamper the credit score of an individual: Apart from the above, another disadvantage of a credit card is that it can have a negative impact on the credit score of an individual if not used judiciously. It is imperative to manage a credit card responsibly and maintain a good credit score so that future credit card and loan applications will be easily approved.

With different kinds of credit cards available in the financial market, it is imperative that an individual gets a hold of a card that serves his/her purpose. But prior to availing a credit card, the above mentioned pros and cons need to be assessed to ensure that the credit card acts a boon rather than a bane.

(This post has been contributed by bankbazaar.com)