CREDIT CARD: Pros & Cons
2 free movie tickets in a month
or cashback
or buying a phone on no-cost EMI.
We all love this.
All these offers, a credit card company
offers you.
It is really important to have a credit card
A lot of people would feel this.
In many malls
You would have seen the chaos of SBI,
chaos of HDFC bank,
which tells you many benefits of having a credit card.
In this post I will tell you the advantages of credit card
along with the disadvantages of credit card.
After knowing both aspects,
you have to take the decision that
whether it is important for you to have a credit card.
My name is Raaj.
You are reading Barkate Raza.
First, lets start with advantages because
all the companies tell you about the advantages.
So let me tell you the advantages.
First is you get benefit in internet purchases
when you buy a phone or any other thing
that you purchase from the internet.
You can get attractive discounts
which can help you save money.
Like extra 5% discount
if you buy from this credit card
or no cost EMI.
You can buy phone on EMI
on which you don’t have to pay any interest.
You can find similar options on internet.
It’s second benefit is rewards program.
In rewards program whenever you
buy something with your credit card
in return you get reward points
In future you can redeem those reward points
and get a heavy discount on your next transaction
Reward points is also a good benefit of credit card.
Third benefit is for employees in India
who pays on behalf of their company
If you pay on behalf of your company
you get it reimbursed.
In that case you should do it from your credit card
because if you pay from credit card
you will get rewards.
You will get the rewards and the money spent
will be reimbursed by the company
and if you pay back credit card company within 45 days,
you don’t have to pay any interest.
So, basically you do company’s expense
from your credit card
which the company will pay you back and you will
get reward points on your credit card transaction.
Next benefit is your transaction statements.
If you buy everything in cash and on month end
you worry
in tracking how much you have spent on what
and because of this your monthly budget hampers.
Then credit card can help you
Every month a statement is sent to your email
that tells how much you have spent on what.
By tracking that, you can make next month budget easily
and you can save.
From saving I remember a disadvantage
which I will tell you later.
Next advantage is of secure purchase.
By secure purchase I mean
whenever you buy something online
through your credit card
that money on your behalf
is paid by credit card company.
Now assume
after purchasing the item, you did not like it
or the item is damaged
and you have to return the item.
then you haven’t paid from your pocket.
The dispute will be
solved by credit card company and the website.
Without paying you can buy and return the product.
Next another advantage of purchases
is insurance.
A lot of credit card companies,
on credit card transactions
provide insurance.
If you have bought a phone via credit card
and company has given insurance on that
then if the phone gets damaged in future
then your credit card company
will repair or replace the product
as per insurance terms.
This depends on which credit card do you have
and whether your credit card company
provides this service or not.
The last advantage is convenience.
You don’t have to carry cash with you.
You just have to keep a card and
wherever you want to purchase,
you can easily pay through your card.
I remember another disadvantage from this
I will tell that in the disadvantage list.
So, what is the wait for
Let’s start with disadvantages.
First disadvantage
of credit card is
high rate of interest.
It is very important for you to know
that the transaction done through credit card is a loan
and the loan
is the most expensive one.
If you take education loan
you get loan @ 10-12%.
You get housing loan at a very attractive interest rate.
You can take any loan, personal loan
but the interest on credit card
is the most.
It may go to 40-42% per annum.
I will show you an example on screen.
of Axis bank credit cards.
See the interest rate
3 – 3.25%
per month is the interest
which take it annually to 40%.
If you do any transaction from credit card
and you have to pay interest on that
then you will lose a lot of money
and credit card companies will gain.
If you are habitual of using credit card
or for monthly 2 free movie tickets
you want to take credit card,
then you should focus on this.
As you will not be able to escape from this interest rate
if you delay your payment
From this I remember a video on money saving.
We at Labour Law Advisor posted
‘How to save money’ some time back.
In that we explained
that you have to save and invest your money.
There are a lot of options of investment.
Few people invest in PF,
invest in PPF or
invest in FD
or invest in mutual funds.
but there are few investment options
which gives you return of 30-40%.
In mutual funds, you get rate of return of 17-18%.
In PPF there is a return of 8.5%.
In PF there is interest rate of 8.5% as well.
You won’t earn as much on your investment
as much money as
you have to pay the interest of your credit card bill.
If you want to create wealth in the future
then credit card is not the right way.
You have to say bye to credit card right now.
If you want to see the video, the link is in ‘i’ button.
You should watch that video.
It can be really helpful for you.
The next disadvantage is credit score.
You have a credit score which is called cibil score.
If you delay your credit card payment
then your credit score is damaged
That score determines
that if you take loan from bank in future
for example, if you take a housing loan
it’s interest rate
will be higher for you compared to others
because your credit score is low.
Credit score low means
bank will not trust you
that you can timely repay the payment or not.
If you have a credit card
and it is very important for you to keep.
then this is important
that you never delay your credit card payment.
Next disadvantage is
the different fees charged by credit card company
because before 45 day if you do the payment
you don’t have to pay the interest.
In that case, it’s not that credit card companies
don’t earn at all.
Credit card companies are in profit
then too you are paying them extra
because there is a maintenance fee for the card.
If you delay the payment even one day
then you have to pay it’s late fee.
If you want to
transfer limit from one credit card to another
there is a fee for that.
There is a fee for everything
which credit card company charges from you.
You can see this fee in transaction statement.
You can see that how much monthly or annually
you pay as fee to the company.
This reminds me of another disadvantage.
This disadvantage is on its terms and conditions.
If you buy a credit card then
there are many documents to it.
One of the document is of terms and conditions.
Terms and conditions are written in little fonts and
the list is too long
that many people do not read it
which traps them in company’s traps.
A lot of credit card company tell you
that we will provide you this credit card
at fixed interest rate.
The interest rate will never increase
in future. This is not true.
They mention in the terms and conditions
that if you delay your payment above a certain period
then they have the right
to increase the current lower interest
So, your interest rate can increase in the future.
If a credit card company advertises fixed interest
rate on credit card
This can be a lie.
It is important to read the terms and conditions.
You cannot take the company to court
because you signed at the terms and conditions
It is your fault if you
did not read the terms and conditions.
Next disadvantage is based on its minimum payments
If you are a credit card user.
You would get a monthly credit card bill.
That bill is of minimum amount
That is never of the entire total outstanding amount.
Seeing that bill you feel
that maybe using credit card is not so bad
we can pay this amount.
Maybe credit card is affordable.
But you need to remember that
credit card company is sitting to do business
to earn money.
In their point of view
the lower your payment
the more they will earn
and you will lose
Now you will ask how?
I will tell you.
Assume you have spent 10,000
from your credit card
and your monthly credit card bill is of 500.
That is the minimum bill that you need to pay,
but the thing is, it is not enough to pay just that.
The story starts here
If you pay 10,000 bill by paying 500 per month
This will take you 20 months plus extra interest.
I have told you the annual interest.
Let me tell you again if you have forgotten.
It is from 35-40%.
The more delay
you do in paying 10,000
the more the company will earn.
The more you will lose.
The next time when you
receive credit card minimum bill
You don’t have to pay minimum bill, instead
at priority
decrease your credit card debt.
You have to pay extra so you
can save the interest.
The next biggest disadvantage is
you never use your credit card for
investments that will have future economic benefits.
What I mean from this is
for example you take a housing loan
you will use that money for construction of home
or purchase of house.
Overtime the house value increases
In future when you sell it
you have capital gain, that is profit.
The loan money that you invested at home
can make you money.
So ultimately you are not at a loss.
Similarly, if you take an education loan.
From that education loan your child studies.
After studies, he gets degree and then a job
or he starts doing a business.
Ultimately he starts earning.
and can repay his education loan from his income.
But if we talk about credit card
it is a loan
that you take to buy groceries
or to fill petrol
or to buy something from internet.
Most of the time ,
the item will not yield you anything in the future.
Instead its value will decrease in the future.
If you buy a phone, it depreciates after a year
nearly to half its rate.
Whatever you buy
it’s value depreciates fast.
So you are buying items which depreciates overtime
and from a loan whose rate of interest
is the highest in the world
compared to all other loans.
So this is not a wise decision.
You should use your cash to buy these things
which brings me to my next disadvantage.
Credit card encourages you
to spend more than what you earn.
Lets say, you earn 50,000
and you have a credit card
then your monthly expenditure
can be higher than 50000
because you always have a backup option.
If the money ends I will use to credit card.
whose bill will come next month
that I can pay with next months salary.
This cycle goes on.
So credit card does not teach you self control
or better financial discipline.
This spoils you.
Whatever advantages I have told you of credit card
or if next time someone tells you to take SBI credit card
because there are 2 movie tickets free per month.
In that case, you should ask yourself,
Do I have the self-control?
That with credit card
that I don’t misuse it,
I only use it when I am gaining something from it
Don’t use it when
from your mistake the company earns, because
companies want that you take credit card
because this is the most expensive loan.
There is highest interest to be paid.
So, a bank or credit card company
earns the most from the credit card.
So, next time while buying credit card
or if you are a credit card user
then you should work on your discipline
and if you don’t need it
then closing it is a better option.
If someone gives me profit at 30%, I will be happy
but if I have to pay 30% interest to someone
then I am not getting rich.
I am not creating wealth
or the money that I have invested in my mutual funds
I am not gaining anything from that
because I am giving double
profit to the credit card companies.
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