Article explains What is a Credit Card?, How Credit Card is Different from Debit Card, Benefit of using Credit Card, Major drawback of Credit Card and How to use Credit Card wisely.
A credit card is also known as plastic money, It is a card or mechanism which enables to purchase goods, travel and dine in a hotel without making immediate payments. The cardholders can use this to credit from banks up to 45 days, after this bank raise bill on the card holder and cardholder makes the payment before the due date to the banker. The credit card relieves the consumer from carrying cash and ensures safety. It is a convenience of an extended credit without formality. Thus, credit card is a passport to safety, convenience, prestige and credit.
There are more than 20 companies are issuing different credit card across the world, VISA credit card is number one with more than 323 Million is Credit card customer base.
Debit card is issued by the Banker against your Savings account. Debit card is allow you to spend from the amount which you have in your account, It does not allow any overdraft/credit purchase. When you don’t have balance in your bank account, your ‘debit’ card is of no use. But a credit card helps you do shopping and entertainment hassle-free as you don’t have to worry about carrying cash. Credit card allows you short-term-zero-interest loan, if repaid before the due date. Credit card helps in building a good credit score which is not possible in case of a debit card.
Credit card is giving lots of Benefits to you if you are prudent with your spending habits and timely payment, some such benefits.
a) No worry for carry cash-Shopping and entertainment hassle-free as you don’t have to worry about carrying cash.
b) Safety of money- This ensures safety of money as PIN has to enter for each execution of transaction.
c) No change Problem- No worry of change problem for small denomination of money, whatever the amount simply swipes the card without any worry
d) Secure Transactions:As per RBI directive all the Credit and Debit cards should have EMV Chip and PIN enabled card w.e.f 01.01.2019. So, use of Debit/Credit card is more secure than Cash.
e) Fulfills emergency cash requirement-Whether there is a medical emergency or any other kind of unexpected cash requirements, credit cards can come for your rescue.
f) Increases purchasing power-With credit cards you can spend more than you actually own. It raises your purchasing power. Even you don’t have money in your wallet still you don’t have to compromise with your shopping list.
g) Interest free credit-Most of the credit cards offer you interest-free period 30-52 days if you repay the credit that you have taken within the due date.
h) Reward points-Most of the credit cards offer reward points on the amount you spend through the credit card. These points can be redeemed against gifted items or transactions like flight booking, dining, online shopping, etc.
i) Cash back-Some credit card offers in the form of cash back, discounts on gas station purchases, fuel surcharge waive and even travel miles.
i) Build a credit history-Credit score can be improved by using effective use of credit card. Banks prefer giving loan to people who has a good credit history.
k) Helps in tracking purchases-Since there is gap of 30-52 days from the date of transaction to date of payment, so, you can plan for your money in the previous months and plan your future expenses accordingly.
l) Fraud Protection-In the case of potentially fraudulent activity, an alert may be sent via a phone call, email, or text message, and the transactions can be stopped.
m) Accidental Insurance-Most of the Credit Card offers free personal accident to their regular cardholders.
n) SMS Alert: After execution of each transaction a SMS alert done by the card which helps to avoid any mis-utilization of card.
o) 24×7 Customer Service: Credit card provides 24×7 customer care services to their cardholders to attend cardholders’ query/problem.
a) Interest charges: Payment on or before the due date is the prime principle of the credit card. If you buy something and don’t pay it on due date, you will end up paying not only the purchase price but also the interest charge on that item. In other words, if you carry a balance, all your purchases will end up costing you a little more. Normal the Interest rate between 2%- 3.5% pm.
b) Fees: Some of the credit cards offers Life time free credit card to valued customer, however most of the beneficial credit card are come with Annual Fee, which is more costly to the cardholders.
c) Temptation: Since it is easy to use, it may make you to overspend.
d) Tricky short-term teaser rates: Some of the Credit card Banks offers low interest rate or Zero processing fee Loan which seems like a good deal, but many people are surprised to find that the rate was only temporary. If you don’t read the fine print, you may pay far more in interest than you expected.
e) Monthly scrutiny:You must review your bill each month to confirm that it accurately reflects your purchases and that there aren’t any signs of fraudulent or unnecessary charges in your card. Credit cards are a prime target for scammers.
f) Mounting Debt: If you carry a balance on your credit card from month to month, it can be very easy for charges and interest to rack up. Many people don’t expect credit cards to be gateways to extra debt, but if you’re not careful, that’s exactly what happens.
Credit card use is not that simple as it sounds. There are so many people stop using credit card after they burn their finger by using the credit card. But if you use the credit cards wisely it will give good return and peace of mind.
There are some principles one has to follow.
a) Requirement:Keep the credit card as per your requirement like co-branded credit card like Petro Card, HSBC-Star bazaar Card, SBI-IRCTC credit card which gives zero service charge while you purchase/transact
from their outlet/site, also gives loyalty points and offers discount while purchases from them etc.
b) Spend as per your repayment capacity-A good rule of thumb for using credit cards responsibly is not to use them for impulse purchases or unaffordable items if you cannot pay it off within a reasonable amount of time.
c) Plan your Purchase: Whenever there is offer see your requirements before you purchase.
d) Make Payment before the due date– Never wait for last date of payment. It can be beneficial to use a credit card for purchases that allow for the balance to be paid off within a reasonable time frame.
e) Never defer the credit card payment– which lead to heavy interest charges which come to around 3.36%pm.
f) Never trap on Loan against the credit card at nominal rate or zero processing charges etc. unless you require the loan.
g) Don’t keep more credit cards and not using the same
h) Payment Schedule: when you are using multiple cards with different payment due date, card payment may be scheduled in the bank under schedule payments. Which will avoid skipping of card payment on due date which lead to late payment charges and reduction of credit rating.
i) Balance transfer from other credit card-some credit card offers balance transfer, when you utilizing a balance transfer offer, make sure to read the terms and conditions and plan on responsibly paying off the balance prior to the end of the offer to avoid paying interest on the remaining amount.
j) Keep Debt-to-credit ratio below 30%– When you have been using credit cards for several years, it may make sense to add a card to obtain a lower interest rate or to transfer a balance to a 0%-interest card, but you need to focus on keeping your debt-to-credit ratio below 30%.To maintain good credit score.
k) Managing Multiple credit cards: If you are holding more credit cards and you want to cancel some them which lead to reduces available credit, which can hurt your debt-to-credit ratio if you have outstanding balances. It is better to leave your credit card accounts open and just put them on ice.
i) Don’t Share Card Details: Don’t Share your Card CVV No., Card Expiry details and OTP (One Time Password) with anybody.
Conclusion: It is no doubt that use of Credit cards can be a convenient way to manage your finances, but they can also be expensive and risky if one person is unable to use the credit card efficiently; so, one should use the credit card very carefully and plan his credit card use as mentioned above, which will reward in various way.