What are the advantages and disadvantages of using a Credit card?
Credit cards are frequently accused of being stress inducing debt traps forced on gullible, unsuspecting customers! However, if managed in the right manner, and as with many other financial products, a credit card can be a very useful and indeed profitable tool available to customers that can help them manage their personal finances more effectively.
What are the advantages of using a credit card?
Availability of short-term credit:
The main benefit of a credit card is that it provides you with the option of making a payment immediately without requiring you to have the money to pay for the purchase at the same time. This gives you the flexibility of having access to a short-term loan whenever you require it. This is especially useful in situations such as a medical emergency or while travelling and so on.
Convenience:
A credit card provides you the convenience of not having to carry cash with you to make the purchase. This is especially helpful in situations where you need to make a large payment or spend time finding the nearest ATM! Credit cards also provide you with the convenience of making payments without having to leave your home. You can use your card to make payments online, or even over the phone saving you a lot of time and effort of not having to travel to make the payment.
Credit cards can also be used to make recurring payments such as monthly school fee payments, insurance premium payments and so on. This feature not only provides you the benefit of saving time by not having to travel to the school or insurance office every month but also saves you the trouble of having to remember to make the payments each month. Just make sure your credit card has a sufficient available credit limit for the payment to go through!
Safety:
As credit cards give you the freedom to not carry around cash with you, this saves you from the risks involved in carrying cash including the risk of it being stolen, damaged, lost etc. While the same could happen to your credit card as well, the risk is typically much lower as you can have your credit card blocked by just a phone call and also limit your liability of any misuse on the credit card.
Earn Rewards on your purchases:
Many credit cards offer Rewards for the purchases that you make on the credit card. These rewards could be of various forms – “Air Miles” that can be used to pay for airline tickets, reward points for dining discounts that offer you discounts every time you use your credit card at a restaurant, shopping vouchers at specific malls or stores and many more. The key point to note here is that you enjoy these additional perks just for using your credit card even if it is for your routine expenses. This is a significant benefit over using cash to make your payments.
Cash-Back Rewards:
Many credit cards offer you a direct cash-back against purchases you make. You receive a specific percentage of your purchase as “cash-back” through a credit in your credit card statement.
The nature of these cash-back programs (and Rewards programs too) can vary significantly from bank to bank and a good understanding of these work will help you maximize the amount you can save by using the card. A typical example is that most credit cards have specific categories of charges for which you can earn cash-back (groceries, school fees for example) and most will also have an upper cap on the amount up to which you can earn cash-back or even reward points.
Additional Benefits:
Almost all credit cards offer some form of additional benefits or “perks”. These could vary from a whole host of benefits including: complimentary access to golf courses, free valet parking at busy malls, free cinema ticket offers, travel and medical insurance while travelling, free access to fitness centers, purchase protection and extended warranties on items that you purchase using your credit card and so on.
As you can see these additional benefits can vary significantly but most provide a significant tangible value to you as a customer if you can identify the credit card that is right for you and use it smartly.
Instant Access to Cash:
A credit card can also be a useful source of cash as most cards give you the benefit of withdrawing cash on the credit card against your credit limit using a regular ATM. Although such cash withdrawals usually incur high fees and interest charges, they can be a useful alternative in case of an emergency.
Record Keeping:
Credit card statements can serve as a tracker for your expenses freeing you from the need to do this separately. Some banks also provide you with a summary of your total spend.
What are the disadvantages of using a credit card?
Overuse:
The most significant disadvantage of a credit card is that it can potentially be used to make purchases beyond the customer’s ability to repay in full. In such a scenario, by only paying a part of the total amount owed to the bank the customer incurs interest charges on the outstanding amount carried forward. Credit card interest rates are amongst the highest in any financial product and carrying forward a balance outstanding and paying interest over a long period of time can be a drain on a person’s financial resources.
While credit cards provide us with the flexibility of making purchases without the need for cash, if used excessively and with no ability to repay the amount quickly they can very easily result in the customer falling in to what is known as the “credit card debt trap”. It can be very tempting to use your card to buy your loved one that perfect gift, or treat your family to a great vacation, or buy the latest electronic gadget available but when there is no clear plan on how soon you can repay these amounts, it is very likely that you will end up incurring large interest charges which will continue to build up until you pay the total amount outstanding in full. However, just like any other financial tools, if used smartly credit cards can provide a range of benefits to the user both tangible (reward points and cash back amounts earned back based on spend) and intangible (convenience, security, safety etc.).
Misuse if stolen:
You could potentially be liable for amounts used on your credit card after it is stolen. However, with improvements in technology such as PIN based transactions, instant SMS and email alerts on all purchases, and also password-based access controls for online usage it is possible to prevent and limit such unauthorized expenditure on your card. Having said that, thieves and hackers are also always trying to keep up with the latest technologies and it is always most advisable to be aware of and follow all instructions advised by your bank to help safeguard your credit card details and usage.
Hidden Charges:
Credit cards have many varying kinds of charges that can vary depending on a lot of factors. The most commonly known charge is the Annual Membership Fee (AMF) which is a yearly fee charged by the bank for use of the card. Not all credit cards have this charge though and almost all banks offer some credit cards which do not have an annual fee. Also, many banks will have a program to waive your annual fees depending on how much you spend on the card during the year and how well your repayment history has been. You could also request your bank to review your card history and provide a waiver on the annual fee if your card performance history has been good. Please do realize however that it is up to the bank’s sole discretion to waive any fees for you!
However, there are several other types of charges such as late payment charges, over limit charges, cash advance charges, supplementary card charges and so on. It is very important to have a sound understanding of what charges your credit card carries and clarify any questions with the bank in case you are not sure of what a particular charge is levied for.
