We no longer live in an era where getting a credit card is considered exclusive! The availability of credit cards has become commonplace today. The event of pandemic led to a rise in digital consumption, reaching tier 2 & tier 3 cities. And suddenly, everything was online! Every process is simplified for people from online meetings to online shopping, from online groceries to digital KYCs.
The process of getting & applying for a credit card is also streamlined, now with video KYC your application got approved. As per Statista, credit card issuance in India in 2023 is expected to be 93 million! This shows how much people are delving into plastic money!
But is it the right step?
While credit cards offer convenience and ease of use, they also come with significant risks and challenges.
The question remains: Is a credit card a friend or a foe?
In this blog, we’ll understand how a credit card works as your friend and a foe to help you make an informed decision!!
How is a credit card your FRIEND?
Credit cards are often viewed as a necessary evil, something that we have to use but try to avoid at all costs. However, credit cards can actually be a valuable friend to have if used correctly. Let’s see how credit cards can be beneficial and even help improve your financial situation!
- Establishing a credit score
A credit card helps build your credit history, which is crucial for loans, mortgages, renting apartments, and jobs. By using a credit card responsibly and paying on time, you can improve your credit score. A better score leads to improved loan rates and financial opportunities in the future.
- Easy access to credit
Credit cards can also be used as a backup for emergency expenses. If you have an unexpected expense, such as a car repair or medical bill, a credit card can help cover the cost until you can pay it off. This can be especially helpful if you do not have an emergency fund or savings account. However, it is important to remember that you should only use your credit card for emergencies and pay off the balance as soon as possible.
- Cashbacks & Rewards
Incentives and offers are part and parcel of most credit cards. You can earn rewards points each time you swipe your credit card, which can be redeemed for air miles or used to pay your outstanding card balance. Additionally, lenders offer discounts on purchases made with a credit card, such as flight tickets, holidays, and large purchases.
How is credit card your FOE?
While credit cards can be beneficial if used responsibly, they can also become a foe if not managed correctly.
- High-interest rates
Credit cards have high-interest rates, usually 36-48% annually, or 3-4% monthly. This makes them a costly financial product. However, there is a grace period of about 20-50 days after making a transaction, and no interest is charged if you pay the full amount.
For example, if you buy a Rs. 10,000 phones on June 20th and have a 20-day grace period until July 5th, you can avoid interest by paying before this date. After July 5th, interest will be charged on the remaining balance.
- Debt trap
Credit cards can lead to debt if used irresponsibly. Be careful not to overspend and create unmanageable debt. This may result in a hard-to-break debt cycle.
Furthermore, credit card companies may offer high limits that don’t match your income and expenses, tempting you to spend beyond your means.
- Credit damage
Not paying your credit bills on time or having a high balance can hurt your credit score. Late payments and large balances may remain on your report for 7 years, making it difficult to get loans or credit later. Missing payments can also lead to being reported as delinquent, causing more harm to your score.
So, what’s the final call?
Credit Cards: Friend or Foe?
The answer is that it depends on how you use it. Credit cards can be a valuable financial tool if used responsibly. They offer convenience, rewards, and protection against fraud. They can also help you build your credit score if used correctly.
However, if you are not careful, credit cards can be a source of debt and financial stress. High-interest rates, fees, and the temptation to overspend can quickly turn a credit card into a foe.