You must have received many calls from companies selling you a credit card, or at some point, you must have thought of getting a credit card for yourself and might have thought about the pros and cons of owning a credit card.
To know the pros and cons of owning a credit card, first, let’s understand what a Credit Card is.
A credit card is a way of paying for your purchases, for which you don’t have to shell out money instantly but at a later period.
Let’s understand this with an example, suppose you go to any mall, buy clothes, and have to pay the bill for the clothes you purchased. For payment, there are many options available; you can pay the amount either by cash, UPI, Debit card, or credit card. Here we will talk about payment through a credit card. So, when you pay through a credit card, there is no actual cash outflow from your bank account, but you are still able to purchase the item.
How has that happened?
That’s the magic of Credit Cards. When using credit cards for transactions, you don’t need money in your bank account to purchase or pay for any article or item.
But how can these companies give you credit and recover the spent amount at a later stage? Are these companies so generous that they will give you free money to spend? To understand these, first, let us learn a few important terms related to credit cards.
Credit Card Time Limit
After you spend through a credit card, some time limit is provided to you by the credit card companies to pay this money back to them. Generally, 30-45 days are provided to pay back this money to the credit card companies. This time limit is called a “Credit Card Time Limit.”
With a credit card, you don’t have to own money in your bank account at the time of purchase but must return this amount within your credit card time limit as per your Credit Card terms and conditions.
Credit Limit
Further, there will be a limit/restriction to the amount of spending that you can do. This spending limit is called the “Credit Limit” of the credit card holder.
The credit limit is the maximum amount that is allowed by the credit card company for the credit card holder to make any purchase for a single billing cycle. Suppose I hold a XYZ credit card where they have allowed me a limit of ₹ 75,000/-; this means I can spend a maximum amount of ₹ 75000/- in a single billing cycle. This ₹ 75000 will be called my credit limit.
Billing Cycle Period
The billing cycle is One month in which all your purchases/transactions are accumulated, and a bill is generated. After the bill generation, a period of 30-45 days is provided (Credit card time limit), and you have to pay for the bill generated within your credit card time limit. It is like a statement your Bank sends to you at the end of the month. Just like a Bank statement lists all the transactions of your account for that particular month, the same way in the Billing cycle period, all the transactions you do are listed, and the final amount is calculated for you to pay.
Now that we know the basic terminology of credit cards let us talk about the Advantages and Disadvantages of owning a credit card.
Advantages of Owing a credit card.
Ø You do not need to have actual money at the time of payment. So in case of emergency, it is very useful
Ø Credit period is provided, which usually ranges from 30-45 days to pay for the amount. So, you can actually pay after a month from the actual date of purchase.
Ø You can pay through EMI if you pay via credit cards. Many Credit card allows you to pay the amount as EMI, which is spread over some months.
Ø Discount/offers – Many offers and cashback are available on different Credit cards.
Ø In the market, many credit cards offer additional benefits like lounge access, free hotel stay, insurance benefits, free movie tickets, etc.
Disadvantages of Owing a credit card
Ø Since you don’t have to pay for the purchase simultaneously, people tend to spend more than their buying ability.
Ø Sometimes, we may forget to pay on the due date, and these credit card companies charge a heavy interest and penalty for the same.
Ø There will be instances when you don’t need a product, but if some offer/ cashback is available, you are tempted to buy that product, resulting in unnecessary spending.
Ø Many credit cards in the market are chargeable and will charge an annual fee.
So, definitely, there are benefits of owning a credit card, but along with it, some risks in the form of excess spending and change in purchase behavior are also there. So before opting for any credit card, please list down its offers/incentives and always track your expense and purchase pattern or any additional fees the credit card company might be charging.
So in this article, we have talked about only the basics of credit cards; in the upcoming articles, we will discuss more complex topics like how credit card companies make money from this business, etc., and will also review the best credit cards for you!
If you want to understand the basics of Motor Insurance, you might find this article useful.
If you find this article useful, do let us know your views in the comments section. If you have any other queries, feel free to ask; we will be happy to help. See you soon!
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