Ever since credit cards made their way into our country, their demand and usage has seen several ups and downs. Even today, you can find a group of people who love to use credit cards and a group that is completely against it. So, what is the right path? Are credit cards good or bad?
Credit cards are one of the most secure forms of payments and when used wisely, you can make the most of their tremendous potential. But, at the same time, they can be detrimental to a person if handled carelessly. Many such stories can be recounted where people who were not able to pay credit card debt in time ended up paying huge sums of money and ruined their credit score as well. The negative aura around credit card created by the misfortune of a few individuals has resulted in many people refraining from using or even getting a credit card.
In this article, we will clear away the fog around credit cards, explore the negative and positive aspects of credit cards and in the process help the people, especially millennials, make an informed decision on whether or not to take a credit card.
A recent report shows that millennials around the world are avoiding credit cards, altogether. There are many reasons why the millennial crowd is not using credit cards. One of the reasons may be associated with a debt spiral their relatives or friends suffered in the past. Availability of many forms of digital payment apps and mobile wallets might have resulted in the drop. Online transactions or app based wallets can be enticing and convenient but they do not yet affect the credit score of the person. The divide is also seen in the millennials where there is one set of people who want nothing to do with credit cards whereas others who have a credit card from every major bank in India. There is a middle ground which will prove beneficial to both the millennials and the businesses themselves and result in better bank services.
So, what’s wrong with credit cards?
Rajneesh, a corporate employee from Mumbai, wanted to buy an air conditioner but could not afford to pay for it in lump-sum. So he decided to put it on his credit card. This would allow him to pay for the air conditioner in easy installments over a period of 6 months. After making two regular payments towards his credit card, in the third month he could only pay the minimum amount due. Lack of cash in hand forced him to put more expenses on his credit card which led to a debt spiral.
Such experiences scar the image of credit cards and create the myth that it is just a trap where if you get stuck you will have a hard time coming out of. Millennials, through their research or shared experiences, have also become wary of buyer’s remorse associated with credit cards.
Should you stop using credit cards?
No. Credit cards are not the problem. The main problem is reckless use of your available credit. A situation like Rajneesh’s occurs when people spend more when they use credit card as compared to cash. A smart use of credit card is extremely important. Let us talk about a couple of things that you must keep in mind when using a credit card.
- Always pay the due amount in full and on time
In your credit card statement, you will find two types of dues- the minimum amount due and the total amount due. The total amount due is what you should ideally pay every month. However, if you cannot afford to pay the entire outstanding amount, the bank gives you the option of paying a minimum amount which is a percentage of the total due. When you pay the minimum amount on or before the due date, you would not have to pay any late payment charges and you can continue using your credit card. But there is a catch. The remaining balance in your account attracts interest/finance charges.
Credit cards, being the most expensive borrowing instrument, charge interests from 2%-4% per month. Another important point to note here is when you have outstanding balance in your credit card account, the new purchases you make are not eligible for the interest-free period. Interest is charged on the daily balance on your credit card so you are paying extra for every single day the amount remains outstanding.
- Understand the impact on your credit score
Your credit score takes a hit when you do not pay your credit card bills on time. Paying the minimum amount due before the due date helps in this case. However, if you fail to pay by the due date, your credit report will show the number of ‘days past due’. Now it could be possible because of some unforeseen circumstance or financial irresponsibility you have raked up quite a bit of an outstanding amount and are even unable to pay the minimum amount on the credit card. On default of such payment, your credit score will take a serious hit.
At this point, you should consider your options to convert the outstanding amount into EMIs and pay them off monthly or if hard pressed for money you can secure a personal loan or secured loan, such as gold loan, and pay off the debt in a few years. Do note that the bank might try to tempt you by offering you a one-time settlement, do not under any circumstance accept it, it is best avoided as debt settlements show up in your CIBIL Score. This will seriously hamper your chances to secure a loan in future.
How credit cards make a worthy addition to your wallet?
The responsible usage of credit cards will ensure many benefits to the user. Some of these benefits are listed below-
- Build your credit history
Credit cards have ramped-up the security features in recent years to ensure safe and secure transactions for their customers. EMV chip is one such feature that has recently been made mandatory for all credit cards. The chip makes your transactions at POS terminals much more secure. There is also a zero liability policy that ensures that the customer does not have to suffer the losses on fraudulent transactions. Dedicated hot-listing numbers also help in getting your credit card blocked as soon as they are lost or stolen. Secure code or One Time Password is another feature that ensures added security when customers use their credit card to make online transactions.
We have established how non-judicious use of credit card can serve to be a real detriment on the user’s financial status and if not tended to could lead to financial ruin. However, we see that if used with caution and with responsibility credit cards can serve to be a great tool that work in favor of the user and help them in the future as well as in the present as a source of building a good credit score and history or as a source of emergency fund. It is up to the individual how they manage their credit cards.
One way to manage all your credit cards is to write down all your purchases made on a particular day. This way you won’t be surprised by your credit card statement when it arrives at the end of the month and will be able to see if you are making any irrational purchases or being financially irresponsible. The only rule is to pay off your outstanding balance in full and on time every month. If you have piled up debt, request the bank to get it converted into EMI or transfer the balance to a different card so that you can pay off in installments. Do not let outstanding balances sit in your accounts; it will only create a debt spiral and can drop your credit score.
Suggested Read: A Beginner’s Guide to Credit Cards