Pros and Cons of Credit Cards

Credit cards come with several benefits like zero interest rate, reward points, cashback, cash advances and EMI facilities that offer a seamless purchasing experience. Using a credit card regularly and responsibly can also help you build a strong credit history and make it easier for you to get a new line of credit. However, incorrectly using a credit card without weighing out its cons can lead to a decrease in your credit score.

In this article, we discuss the pros and cons of credit cards and how you can choose the right one.

1 - Make use of interest-free days

Almost all credit card providers now offer an initial interest-free period for new credit card owners. This is applicable to all purchases and the period usually lasts for the first 45-60 days of getting the credit card.

During the introductory period, you aren’t charged any kind of interest on your credit card payments and this is applicable until and unless you pay all your balances in full by the due date.

Though it's important to note that the interest-free offer does not apply to balance transfers or cash advances.

2 - Rewards and additional benefits

Credit cards also offer additional benefits of using them through reward points, frequent flyer miles, or cashbacks on purchases. When you use a credit card regularly, you can collect reward points which can then be converted into coupons or used for purchasing different items.

Similarly, you can use frequent flyer miles for booking airline tickets. Though you should remember that reward credit cards also have a considerably high annual fee and probably a high-interest rate as well.

If you aren’t sure about credit card repayments every month, it's better to just get a card with zero interest rate and fewer incentives than one with high rewards and high interest.

3 - Build credit

When you use credit cards properly, it can help build credit history and subsequently improve your credit score. Using credit cards properly means that you need to pay your bills on time. Even if you can’t afford to pay a particular month’s bill in its entirety, you at least should pay the minimum required amount.

At the same time, you need to keep your credit utilisation ratio to the minimum. It's usually recommended that you only use 30-40% of your credit limit at once and not more than that to show lenders that you can manage credit responsibly.

A higher credit score means lenders see you as a better candidate and they are more likely to approve you for a new line of credit. You are also more likely to get better pre-approved offers, lower interest rates, and more benefits.

4 - Pay your debt over time

One of the biggest reasons why people are inclined toward credit cards is because it allows them to pay off their balance over a specific period of time, instead of paying it all at once. This can be especially helpful when you are making a big purchase that you can’t afford to pay for upfront.

Moreover, since you don’t get charged right away for your purchases and the entire amount doesn’t get deducted from your bank account, it makes credit card purchases more secure than the traditional payment methods.

If someone were to gain access to your credit card or your card details, they could potentially charge you for irrelevant purchases. But they cannot drain your bank account or take your money. In case your credit card is indeed stolen, you can always file a fraud complaint with the credit card provider to get the credit card fraud charge removed.

1 - Complicated fees and interest

Credit cards have a lot of fees attached to them which can make it difficult for you to understand how much you are paying for using the cards and why. For instance, just because a credit card states its interest fee, doesn’t mean that it is interest-free for its entire lifetime. Similarly, when a premium credit card offers a lot of initial benefits and alluring rewards programs, it may have a high annual fee attached to it.

Credit cards with zero interest and zero annual fees may have a high late payment fee and they even start charging you an interest rate higher than the market average on delayed payments.

All in all, it's important to remember that while credit cards can be undoubtedly helpful, credit card providers are in this to make money. You should make sure that you read the fine print before getting a new credit card in order to understand all the different fees and interest rates.

2 - Can fall into debt

When you get a credit card with a seemingly high credit limit, it can feel like owning infinite pools of money. You can make purchases wherever you want without worrying about the amount of money in your bank account. But this attitude can not just get you into serious credit card debt, it can also make it incredibly difficult for you to get a new credit card or loan of any kind.

Overspending through a credit card without being able to afford your monthly payment bills can lead to your balance being carried on to the next month along with added interest and late payment bills. Paying a minimum amount every month may seem like a quick shortcut, but you can’t do it every month. You will eventually have to pay a bulk of the amount you owe or you will end up paying more in interest than the actual amount you owe.

The best way to avoid falling down the debt trap is by reading the fine print before getting a new credit card and also keeping your spending under control. Ideally, if you aren’t sure you can pay off the debt in its entirety in the next few months, it's best to not make that purchase at the moment.

3 - Negative effect on credit scores

While using credit cards correctly can help you build credit, improperly using credit cards can have a negative impact on your credit cards and affect your credit report for a long time. Some of the many behaviours that can affect your credit score include late payments and using too much or the entirety of your credit limit.

However, you can use your credit cards responsibly in order to make sure it doesn’t decrease your credit scores. Start by setting up automatic payments for your credit cards and make sure to not utilise the entirety or even the majority of your credit limit.

When you are dealing with the ‘How to choose a credit card’ question, its necessary to consider the following factors:

Credit limit: It is the maximum amount that you can borrow through your credit card.

Interest-free days: It is the starting period of time where you aren’t charged any kind of interest when you make payments through your credit card.

Cash advances: Sometimes, credit cards allow you to withdraw cash directly from ATMs, but this usually attracts a separate cash advance fee and a higher interest rate as well.

Rewards program: Some credit cards offer rewards for the purchases you make through your credit cards. This can be in the form of reward points, cashback, or frequent flyer miles.

Insurance cover: Some credit cards may even offer complimentary insurance like warranty insurance, accidental insurance, purchase protection insurance, and travel insurance.

Annual fee: The annual fee is the yearly cost of using and maintaining a credit card. This fee is deducted from your credit limit and it also gets interest accrued over it if you don’t pay it in the year’s first monthly bill.

Interest rate: It is the total rate of interest that you pay on the money borrowed through the credit card.

Late payment fee: When you miss your monthly payments for the credit card bills, a late fee is levied in next month’s bill.

• Always read the terms, conditions and the fine prints that come with a credit card to be aware of all hidden costs and charges
• Ask your credit provider about all available credit card benefits before applying for the same
• Keep track of all your purchases so you do not spend more than you can afford to pay back
• Always check the credit limit available and minimise your spending accordingly
• Keep a solid portion of your available credit for emergencies
• For larger purchases, choose EMI options wherever possible to divide your spending in a span of a few months
• Pay your entire credit bill on the due date and avoid adding to the debt

Not more than four.

Although, the ideal number of credit cards that you should have depends on your lifestyle, monthly income, and ability to pay dues. It is best to start your credit journey with a single card and get more as you become more aware of how credit cards work. It is a good practice to have multiple credit cards for different types of purchases and rewards. However, hoarding onto too many of them may impact your credit score negatively.

Yes, you should get a credit card, provided you have a source of income to repay the credit. Using a credit card to pay your bills regularly and repaying the issuer on time every month helps in maintaining a good credit score that leads to several benefits with respect to loan approvals, renting houses, insurance rates, and more.

Getting a credit card opens several purchasing doors for you and also helps in building strong credit ratings, which no other instrument can provide. Before applying for a credit card, check your free credit score and determine your eligibility for the same.

With ClearScore, you can check your credit score to identify which credit cards you are eligible for and which cards are best suited for you.