Credit card services are provided by banks to its customer so they can buy goods and services on credit. This service allows the customers to make lumpsum payment for their purchases on credit and in turn they may pay it back interest free before a particular date or decide to make periodic payments on some excess cost.
This service has many potential pros and cons that makes it both bane and boon to the customers. On one side it provides option of easy financing, the type of goods and services being bought makes the choice of credit card extremely important. If the customer intends to make only minimum amount payment, he should be taking credit cards that charge low interest on the pending amount. The rewards cards are supposed to have high interest and in the above case the it is a bad choice for the customer. Instead if the customer pays off the due amount before the due date and the cost because of interest rate is less than the rewards being obtained on transactions, then rewards card should be preferred.
Credit Card provides better option than cash. Cash is limited to in person purchases or cash on delivery, while credit card can be used to make purchases on phone, internet and in person. It is faster to use and it provides with ability to pay in installments. It provides with zero financing cost especially during emergencies and rewards in the form of points, miles or gift cards. Most important benefit of credit card is that it can help in making a good credit score without taking any loans. Lastly, they can be useful in cancelling payment in case of billing errors. (Get your credit score absolutely free)
Credit card provides cheap currency conversion on international purchases. VISA and Mastercard provides the facility of on transaction fees on foreign transactions. Credit cards also provides theft protection with its fraud liability guarantee.
On the other side, credit card is reason behind existence of many bad debts. It provides an option of easy spending and many a times customers get away by making only minimum amount due, never paying their full payments. Many hacks have also come up with using two credit cards to pay the bill of each credit card, never actually paying the bill. Credit cards should be only considered options for short term credit, anything more can lead to dire consequences. They have very high interest rate and can lead to creation of bad debts and non-performing assets for the banks.
Although, credit card helps in building your credit score, it can also ruin the credit score in case the credit card debt keeps piling up. The credit score also takes a hit if a customer keeps issuing credit cards. Higher number of credit cards make a customer get lower credit score.
Credit card cannot be used to withdraw cash from ATM because interest accrued on the cash as soon as it is withdrawn. In addition to interest expense, cash advance expense is also charged.
Credit card has many expenses like annual fee, cash advance expense, account overdraft fees and possibly foreign transaction fees. Credit Card also has vague disclosures which are very important to be understood. Credit cards are equipped with Schumer’s Box which has all the information for credit card but the information can be lost on all the jargons. This in one way can help improve financial literacy in the customers. Credit card can have many downsides if it is taken without any proper understanding.
Additional Reading: 6 ways to lower your credit card interest rate
There is also a facility available called deferred interest financing, where there’s zero per cent interest if the due amount is to zero by the end of zero interest rate period or no delay has been made in monthly repayments. In case it does, the high interest rate is applied retroactively to the original purchase.
In conclusion, the credit cards can be very useful if they are used responsibly but can prove to be deep pits if handled carelessly. They should only be used if the customer is completely aware of all the term and conditions along with interest charged on the unpaid due amounts and rewards and fees incurred. If the customers overspend and missing scheduled payments, it will neutralize all the pros and can fail to be an efficient financial tool.