What is Credit Card
A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder’s promise to the card issuer to pay them for the amounts so paid plus the other agreed charges. The card issuer (usually a bank) creates a revolving account and grants a line of credit to the cardholder, from which the cardholder can borrow money for payment to a merchant or as a cash advance. In other words, credit cards combine payment services with extensions of credit. Complex fee structures in the credit card industry may limit customers’ ability to comparison shop, helping to ensure that the industry is not price-competitive and helping to maximize industry profits. Due to concerns about this, many legislatures have regulated credit card fees.
A credit card is different from a charge card, which requires the balance to be repaid in full each month. In contrast, credit cards allow the consumers a continuing balance of debt, subject to interest being charged. A credit card also differs from a cash card, which can be used like currency by the owner of the card. A credit card differs from a charge card also in that a credit card typically involves a third-party entity that pays the seller and is reimbursed by the buyer, whereas a charge card simply defers payment by the buyer until a later date.
Advantages of Credit Cards:
Easy access to credit- the biggest advantage of a credit card is its easy access to credit. Credit cards function on a deferred payment basis, which means you get to use your card now and pay for your purchases later. The money used does not go out of your account, thus not denting your bank balance every time you swipe.
Building a line of credit– credit cards offer you the chance to build up a line of credit. This is very important as it allows banks to view an active credit history, based on your card repayments and card usage. Banks and financial institutions often look to credit card usage as a way to gauge a potential loan applicant’s creditworthiness, making your credit card important for future loan or rental applications.
EMI facility– if you plan on making a large purchase and don’t want to sink your savings into it, you can choose to put it on your credit card as a way to defer payment. In addition to this, you can also choose to pay off your purchase in equated monthly instalments, ensuring you aren’t paying a lump sum for it and denting your bank balance. Paying through EMI is cheaper than taking out a personal loan to pay for a purchase, such as a television or an expensive refrigerator.
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.
Flexible credit– credit cards come with an interest-free period, which is a period of time during which your outstanding credit is not charged interest. Ranging between 45-60 days, you can avail free, short-term credit if you pay off the entire balance due by your credit card bill payment date. Thus, you can benefit from a credit advance without having to pay the charges associated with having an outstanding balance on your credit card.
Record of expenses– a credit card records each purchase made through the card, with a detailed list sent with your monthly credit card statement. This can be used to determine and track your spending and purchases, which could be useful when chalking out a budget or for tax purposes. Lenders also provide instant alerts each time you swipe your card, detailing the amount of credit still available as well as the current outstanding on your card.
Purchase protection– credit cards offer additional protection in the form of insurance for card purchases that might be lost, damaged or stolen. The credit card statement can be used to vouch for the veracity of a claim, if you wish to file one.
Disadvantages of Credit Cards:
Minimum due trap– the biggest con of a credit card is the minimum due amount that is displayed at the top of a bill statement. A number of credit card holders are deceived into thinking the minimum amount is the total due they are obliged to pay, when in fact it is the least amount that the company expects you to pay to continue receiving 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.
Hidden costs- credit cards appear to be simple and straightforward at the outset, but have a number of hidden charges that could rack up the expenses overall. Credit cards have a number of taxes and fees, such as late payment fees, joining fees, renewal fees and processing fees. Missing a card payment could result in a penalty and repeated late payments could even result in the reduction of your credit limit, which would have a negative impact on your credit score and future credit prospects.
Ease of overuse– with revolving credit, since your bank balance stays the same, it might be tempting to put all your purchases on your card, making you unaware of how much you owe. This could lead to you overspending and owing more than you can pay back, beginning the cycle of debt and high interest rates on your future payments.
High interest rate– if you do not clear your dues by your billing due date, the amount is carried forward and interest is charged on it. This interest is accrued over a period of time on purchases that are made after the interest-free period. Credit card interest rates are quite high, with the average rate being 3% per month, which would amount to 36% per annum.
Credit card fraud– though not very common, there are chances you might be victim of credit card fraud. With advances in technology, it is possible to clone a card and gain access to confidential information through which another individual or entity can make purchases on your card. Check your statements carefully for purchases that look suspicious and inform the bank immediately if you suspect card fraud. Banks usually waive off charges if the fraud is proven, so you will not have to pay for purchases charged by the thief.