Credit Card Advantages and Disadvantages: All You Should Be Aware Of

A credit card has become an indispensable financial tool. It proves to be a haven in times of urgency when one is short of cash. The purpose is met, and the cardholder can pay back the availed credit amount within a stipulated time frame, which invariably ranges between 25-50 days. The cardholder has the option to pay only the Minimum Amount Due or the entire outstanding balance. They can exercise it as per convenience. But this is precisely where the catch lies.

The moment the cardholder pays back only the Minimum Amount Due, the remaining outstanding balance starts attracting finance charges at the rate of interest decided in the terms and conditions. If not handled carefully beyond this point, the innocuous credit card suddenly pushes the cardholder into an unending debt trap. Rightly so, credit cards are a double-edged sword.  

Therefore, one should carefully understand both credit card advantages and disadvantages before applying for one. Listed below are the advantages and disadvantages of a credit card.

What are the Advantages of Credit Cards?

What are the advantages of credit cards? Well, the list will be endless. From first-time credit card applicants to experienced card users, prudent use of credit cards promises to add value to every rupee spent on the card.

The advantages of credit cards include:

• Easy Credit – The main reason behind the advent and rise of credit cards is their easy access to credit. As a short-term credit instrument, every credit card swipe allows you to purchase now and pay later. This does not reduce the existing bank balance and will enable cardholders to quickly pay off the credit amount later within the stipulated period.
• Instant Credit – Besides providing easy credit, a credit card also ensures instant credit. Once the credit card is active and operational, one can swipe it without any additional formalities. 
• Interest-free credit - the period between the two billing cycles is the interest-free window. This is invariably between 25-50 days. The amount of credit availed on the credit card does not attract any interest charges until the end of the current billing cycle. This used credit reflects in the next billing cycle. The cardholder has the option to pay the Minimum Amount Due (calculated @ 5% of the total outstanding) or the entire outstanding amount on or before the due date. Cardholders who opt for the latter, i.e. pay off the entire outstanding, effectively avail credit without paying any interest charges thereon.
• Rewards and Privileges – The most common response to ‘what are the advantages of credit cards’ is its unmatched rewards program.  Every transaction initiated on the credit card helps you earn reward points which can be redeemed for cash back or exclusive products in the reward catalogue.  Co-branded credit cards are perfect for brand-loyal customers, thanks to additional discounts, privileges and complimentary benefits on partner brands.
• Boosting Credit Score – A healthy financial standing and credit score are essential for availing of future loans. A credit card plays a vital role in promoting your credit score. To be candid, it acts as the first step to build a line of credit. Based on credit card usage and repayment history, one can gauge the creditworthiness of the customer.
• EMI Facility – A credit card allows you to purchase high-value items without disturbing your current cash liquidity. The availed credit amount can be converted into manageable EMIs and thus paid off over a period of time without feeling the cash crunch.
• Buy Now, Pay Later – A credit card operates on the concept of ‘buy now-pay later’. This allows one to purchase items immediately without worrying about cash availability. The outstanding amount on the credit card can be paid off as soon as you receive a salary credit! 

What are the Disadvantages of Credit Cards?

Credit card advantages and disadvantages go hand-in-hand. While the advantages of the credit card outnumber its disadvantages, it is crucial to be aware and cautious about the demerits as well. The disadvantages of credit cards include:

• High Rate of Interest - Credit availed on a credit card attracts a very high rate of interest. Some lending institutions charge as high as 4% per month (around 48% p.a.). This makes the credit card the costliest credit instrument. Furthermore, cash withdrawal on a credit card does not provide an interest-free period and incurs interest charges from the day of withdrawal. 
• Debt Trap – While the ‘buy now, pay later’ concept attracts everyone, not all cardholders can handle it right. The most significant disadvantage of a credit card is the Minimum Amount Due mentioned atop a credit card statement. The cardholder feels that this is the amount that is required to be paid. The Minimum Amount Due is 5% of the total outstanding. It’s the remaining 95% that gets converted into a Minimumessentialrevolving credit and starts attracting finance charges. This eventually turns into a debt trap for the cardholder.
• Overspending – The convenience of using a credit card often pushes one into overspending. Cardholders often resort to impulsive buying and tend to buy things that could have been easily avoided. As a rule of thumb, the credit card utilization ratio should be 50% of the total credit limit sanctioned on the card.
• Bad Credit Score – Just as a credit card is an important tool to build a credit score, it can also prove to be a financial disaster if not used prudently. Faulty and delayed payments get highlighted, and the cardholder may soon find their name in the defaulter’s database circulated among different lending institutions. This can snap all further chances of availing of additional loans.
• Fee and Charges – There is a cost involved in setting up a credit card. The issuer will levy a joining fee and annual fee to keep the card operational. The banks offer a ‘fee waiver clause’, but this is linked to minimum spend and thus pushes the cardholder into overspending. Furthermore, other charges like duplicate fee charges, cash withdrawal charges, add-on card charges, etc., sum up unnecessary outflows.
• Online Fraud – Credit cards are susceptible to online fraud. Credit card information can be misused, making the subscriber vulnerable to financial losses. Thankfully, the cardholder can immediately approach the issuing bank and have the card blocked in such an event. The cardholder may follow the appropriate redressal procedure to resolve their grievance.

How to Choose the Best Credit Card?

When choosing a credit card, it is essential to know the advantages of credit cards and the disadvantages of credit cards. To multiply the benefits one can reap on a credit card, making the right choice in terms of card category and features becomes extremely important.

Listed below are key factors that add to the advantages of credit cards:

• Co-branding Partner – Credit card companies collaborate with retail giants to roll out co-branded credit cards. This category of credit cards offers rewards and benefits that are linked to the partnered brand. Fuel cards, travel cards, shopping cards; one may further trim down their credit card search depending upon the type of need. A high level of engagement with the partnered brand is fundamental to maximise rewards.
• Spending Profile – To zero in on the best credit card to suit your needs, it is essential to outline your spending habits beforehand. A frequent traveller must choose between travel and fuel credit cards, whereas a lifestyle enthusiast is bound to gain the maximum through shopping, lifestyle and reward credit cards. For credit card subscribers whose spending pattern and card category match, the rewards and benefits multiply manifold.
• Inclination Towards Reward Points – Accumulating reward points on every spending on the credit card adds worth to money spent. Thus, cards that offer accelerated reward point accumulation fare better among cardholders who incline rewards points. You can redeem these reward points for exciting gifts and cashbacks.
• Fees and finance charges – The fees and finance charges applicable on the credit card are cash outflows for the cardholder. Therefore, when choosing the best credit card, it is essential that these expenses remain low. Some cards may offer exclusive benefits but have a high annual fee. Weigh the benefits and expenses carefully.
• Fee waivers – Exploring no annual fee credit cards to get a spending-based fee waiver can prove fruitful. But ensure that your monthly expenses on a credit card can help you reach the minimum spending limit to get the fee waiver. Else, you’ll end up overspending every year, which can ultimately lead to financial disruption and distress.
• Lifetime Free Credit Card – For people who have active fixed deposit accounts in the bank, applying for a lifetime free credit card is advisable. These cards are issued against security, invariably a fixed deposit. While you continue to earn interest on your fixed deposit, the credit card provides the required liquidity. Above all, it's lifetime free.

Conclusion

Credit cards, akin to any other financial instrument, have their own set of pros and cons. The subscriber must give credit cards advantages and disadvantages due thought.  However, due diligence in usage and timely repayments can prove to be a boon for the cardholder. The cardholder should resist the temptation of making impulse purchases or exhausting the credit limit to the extent that it cannot be repaid in-toto before or on the due date. All said, the benefits far outweigh the demerits of such cards.