Benefits and Challenges of Using a Credit Card

Introduction

Credit card is a very useful financial innovation. It enables you to carry out transactions without having to physically carry money or even without having that money for a limited period. It gives you convenience and safety. The use of credit cards originated in the United States during the 1920s, when individual firms, such as oil companies and hotel chains, began issuing them to customers for purchases made at company outlets. The first universal credit card, which could be used at a variety of establishments, was introduced by the Diners’ Club in 1950.

Difference Between Credit Card and Debit Card

In appearance, both the cards are identical, however, quite different in use. Through a debit card, you can make payment for a purchase at a POS (point of sale) from the money you already have in your bank account. If sufficient funds are not held, the transaction will be declined.

In the case of a credit card, you can make payments up to a limit assigned to your credit card by the issuer: normally a bank. The payments made by you will keep aggregating to your credit card account. You will be billed, typically, on a monthly basis.

Eligibility for a Credit Card

The issuer of the card will determine your eligibility by verifying your proof of income and some other details. Whether you are a salaried person or doing some business, you have to be earning a regular income to get a credit card. The credit limit will be assigned by the issuer according to your average monthly income and some other factors.

Should You Use Credit Card or Not?

Credit card is very useful and has many advantages if you are financially disciplined and have full control over your expenses. In the other case, it can be problematic. It is very easy to overspend if you have a credit card. Therefore, take a decision accordingly.

Benefits of Using a Credit Card

Credit card is all about freedom and convenience. However, there are some attendant hazards as well. Firstly, some of the benefits a credit card can bring to you are as under:

Roam Around Cash-Free

It liberates you from the hassle of carrying cash around, provided the outlet where you want to shop is enabled to accept payment from a credit card.

Use Interest-Free Loan

Credit card means that you don’t have to make immediate payment for any purchase you have made. It will be credited to your bill which you will have to clear by a specified date. This implies that you are availing an interest-free loan. The duration of this loan is from 20 to 50 days depending on when you carry out a particular transaction. Probably, this is the only way to get an interest-free loan. During this period, your money set aside for the purchases made for that billing cycle can sit in your bank account earning interest.

Enjoy Deals and Rebates Offered by the Issuer

Issuers of credit cards offer you certain deals and rebates at restaurants, clothing stores, and other outlets in order to promote their credit cards. You can enjoy these offers if you have a credit card.

Avail 0% Mark-up Installment Plans for Products on Offer

Credit cards also offer you 0% mark-up plans for certain products. You can purchase the item and make payment in installments through the credit card. However, before buying, you should compare the price on offer with the price of that product in the market. There may be some difference. Buy only if it makes sense.

Automatically Document/ Track Your Expenses

Tracking your expenses is always very useful. A credit card automatically does it for you and maintains a record of all your transactions which you can subsequently refer to in case of any doubt or for planning and budgeting your future expenditures.

Collect Reward Points for Subsequent Redemption

Whenever you make a purchase through your credit card, you earn some reward points which keep accumulating. Every reward point is worth a tiny amount according to the credit card’s reward points policy. You can redeem these points either by buying something that is on offer or to clear the credit card bill.

Improve Your Credit Worthiness

As you use a credit card, your credit history is being maintained by the bank. If you clear your bills, in time and in full, you get a good credit score from the bank which is a measure of your creditworthiness. Your credit score will help you get a loan approved, if and when you apply for one. However, getting a loan from the bank should be a well-considered decision.

Meet Your Emergency Cash Requirments

If you need some cash in an emergency, you can immediately get it, up to a specified limit, from your credit card and fulfill your need.

Make Secure Online Payments

You can present your credit card physically at a shop for making a payment. Additionally, you can also make purchases online using your card.

Suggested Precautions While Using a Credit Card

Although credit card is a very convenient tool, it can cause a lot of financial trouble if not handled appropriately. If you follow these precautions and use your credit card with utmost care, you can optimize its utility manyfold:

Alway ensure safe custody of your credit card. You mustn’t lose it. Inform the issuer immediately, if you do. Alternatively, in the event of loss, block it through the banker’s mobile app and inform them later.
Never share your credit card details with anyone. Change your PIN frequently.
If you don’t use your credit card frequently for online purcahses, it should be preferable to populate credit card details manually. Don’t use “auto save details” option for later use.
If you use your card online frequently, you may save your details on one of the credible websites like Google or Amazon and use “auto fill” option from there, whenever you need to. Don’t save your details on many websites, especially the less known ones. This is going to keep you safe from hacking and online scams.
You should use your credit card on the websites where the transaction is secured by generating an OTP (one time password) which is received by you either through SMS or email.
It is also advisable to to keep your card on a termporary block if you are not a frequent user. You may un-block it just before the use and re-block it immediately after using it. Most issuers offer this option on their mobile apps.
Be particular in paying your bill by due date, in full. If you fail to, the bank levies an interest at the rate of 2.5 to 3% per month (30 to 36% per annum) which is a lot. This is applicable from the date of transaction instead of the period starting from the last due date. In order to ensure that you don’t fail to pay the bill, activate auto-pay option from your bank account for the last due date.
Avoid withdrawing cash from your credit card because the interest is applicable right from the date of withdrawal and no grace period is given.
The maximum limit of your credit card for a particular billing cycle should be set at about 50% above your average monthly expenditure, in consultation with your bank. Don’t be tempted to have your limit enhanced. Firstly, it will act as a check on your expenses and secondly it will also protect you against scams because you can be scamed only upto the limit of your card.
While using a credit card, keep your paying capacity in mind instead of the credit limit of your card.
Instead of having 6-8 or even more credit cards for one reason or the other, it is advisable to limit yourself to 1-2 cards for the sake of easy handling and safe management.
Although you should be particular not to let credit card debt pile up, if you are, somehow, already under debt of various types, first plan to pay off the credit card debt because this the most expensive one. You may consider getting a cheaper loan to pay off the expensive one and then clear the cheaper one subsequently.
If you are delared ineligible for an un-serured credit card, you may opt for a secured one. It implies that you can put some money in the bank fixed deposit and against your deposit, the bank will issue you a secured credit card. The limit of spending per billing cycle will be determined by the amount of fixed deposit instead of your assessed financial position.
The bank charges an annual fee for the credit card issued which can be written off if you make a number of transactions equal to an amount specified by the bank within a specified period. Instead of paying the annual fee, you should avail this write off facility.

Conclusion

Credit card is sharp and double-edged. You can use it to your best advantage but it can also cause you financial harm. Therefore, learn how you use it smartly. Don’t share its details with anyone. Protect yourself from scams. Respect your financial limits and remain well within those. Leverage your card to collect maximum benefits and rewards and it is going to serve you very well.

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