Advantages & Disadvantages of Using Credit Card

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A credit card has become an important part of our daily lives, reason being, ease of use and convenient payback options. Moreover, a best credit cards comes with attractive reward points and cash back offers that can reduce our overall spending amount. However, if you do not use your credit card wisely, it can land you in a huge financial trap. Hence, if you’re using the credit card for the first time, here’s a list of the advantages and the disadvantages associated with your little plastic card.

Advantages of a credit card:

Improves credit score: One of the biggest advantages of using a credit card is that it helps to build your credit score. If you use your credit card responsibly and pay your credit card bills on time, it would help you build up a good credit score. Moreover, you can get easy approval of loans such as a personal loan or home loan in the future.

Best alternative to cash: A credit card prevents you from the hassle of carrying cash wherever you go. On just one swipe, you can buy anything you want. In case you lose your wallet, a credit card can be quickly cancelled. Most financial institutions also have security processes for the purpose of helping you in case your card has been lost or stolen or if you suspect that any fraudulent activity has taken place on your card.

EMI facility: If you plan on making a big purchase and don’t want to spend your savings on it, you can choose to put it on your credit card as a way to defer payment. Plus, you also have the option to opt for equated monthly installments (EMIs), ensuring you aren’t paying the full amount in one go and denting your bank balance.

Earn reward points and cash back: Credit cards come with attractive offers and incentives. These
ranges from reward points to cash back accumulation whenever you swipe your card, these points can be later redeemed or used towards paying your outstanding dues. You can also get discounts on flight tickets, holidays or large purchases if you make payments through your credit card.

Interest-free period: Credit cards come with an interest-free period. It means that during this period your outstanding amount is free from any interest charges. Ranging between 45-60 days, you can avail free and short term credit if you pay off the entire outstanding amount by the due date.

Disadvantages of using a credit card:

Higher interest rates: Credit card comes at a higher interest rate. If you do not pay your outstanding amount by the due date, you will be charged hefty amount as interest charges. Credit card interest rate is usually up to 3% per month, which would amount to 36% per annum.

Minimum due trap: A number of credit card holders believe that the minimum amount is the total due they are liable to pay, when in fact it is the amount that you need to pay to receive credit facilities. Paying just the minimum amount attracts interest on the outstanding bill, which could build up to a large and unmanageable sum over time.

Hidden charges: A credit card comes with several hidden charges such as annual fee, GST, overdraft charges, processing fee, joining fee, etc. that could rack up the expenses overall. Hence, before you choose a credit card, make sure to ask your lender about all the other charges.

Credit card fraud: With the advent of advanced 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 every month and if you find any purchases that look suspicious, inform the bank immediately.

Hence, if you are planning to apply for a credit card, make sure you are aware of its advantages as well as disadvantages.

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