Updates 4 Life

There has been a lot of debate about Credit Cards. Are they good or bad? Does credit card usage negatively affects our budget and financial plans?

My personal experience says that credit cards are good as long as its master(cardholder) maintains discipline and caution over the spends. In this post, I’ll share the advantages and disadvantages of using a Credit card based on my experience, followed by some recommendations.

Advantages of Credit Cards

• Interest-free credit – Credit card offers an interest-free period and a credit limit. If the cardholder pays his full dues by the payment date, no interest is charged. However, interest is charged on any amount carried forward to the next month. Understanding this is the most important factor if one plans to use a credit card. A good article for the details -> https://www.bankbazaar.com/credit-card/interest-rates.html
• Convenience* – Instead of carrying cash, you can use the cards at a majority of merchants. Occupies less space in your wallet. Some cards also offer contact-less transaction which shortens the billing time.
• Cashless* – Credit card usage promotes a cashless society where physical banknotes and coins are no longer required. You can use them at small shops to big supermarkets, e-commerce sites(Amazon, Flipkart etc.), utility bill payment, ordering food, adding money to digital wallets(Paytm, AmazonPay, PhonePay etc.)
• Safety and Security* – Apart from basic security features like signature panel and CVV code, advanced security features like EMV chips, OTP/security-code are also offered. RBIs recent guideline for tokenization of card transactions(credit and debit) is aimed to further improve the safety. All major credit cards networks(VISA, Mastercard, American Express) put in a lot of efforts and budget to protect customers against fraud. They also offer zero liability policies in case of card loss, theft or unauthorized use.
• Tracking expenses* – As your transaction history is easily available online, it’s easy to track expense and manage budgets. Much simpler than remembering where you spent the cash.
  Merchant offers – Majority of the e-commerce sites run regular discounts or no-cost EMI offers on specific credit cards. These offers can be based on the network (VISA/MasterCard/AmEx) or the card issuer bank(HDFC, Axis, SBI etc.). We’ve availed these discounts multiple times while booking flights, buying electronics etc.
• Rewards Program – Almost all credit cards offer reward points on a minimum spend which can be accumulated and redeemed to buy gifts, travel bookings etc. We’ve been able to buy a good wristwatch and book domestic flight tickets a couple of times by accumulating points in a span of 1-2 years.
• Foreign Currency Spends – As credit card networks operate worldwide, credit cards can be used for transacting in foreign currency. There is an associate markup charge of 1-3% for such transactions. Debit cards charge a bit higher.
• Other privileges – Some high-end credit cards offer free domestic/international airport lounge access, dining privileges at selected restaurants, airline partner privileges etc.
  Improving Credit score and loan processing – Timely credit card payment history and not exhausting your credit limit helps to improve your CIBIL score. The CIBIL score is a key factor which banks or NBFCs check before approving loan requests.
• Customer Service – All major credit card providers have dedicated customer service to help customers with queries, concerns or disputes. Sometimes, they also levy off some penalties or charges for maintaining a good customer experience.

* Same advantages are also offered by Debit Cards.

Disadvantages

• Overspending – A cardholder can overspend(up-to-the credit limit) if he lacks discipline or doesn’t track the expenses regularly. This can severely affect the budget and finances.
• Interest charges – If one fails to pay his/her credit card dues on time, credit card providers would charge a hefty interest which will continue to grow unless all outstanding is paid in full. The charges are even higher if one withdraws cash using the credit card.
• Fraud – As technology evolves at a rapid pace, hackers also come up with new methods to make fraudulent transactions by stealing or copying the credit card details. Phishing, Pharming, Vishing or Smishing are some of the methods to do this. A good article to explain each of them – https://security.intuit.com/index.php/protect-your-information/phishing-pharming-vishing-and-smishing
• Poor Credit Score – Defaulting on credit card payments negatively impacts the credit score and the chances of loan approval.
  Renewal charges – While all credit cards advertise themselves as free, this is mostly associated with some T&Cs. Ex. A minimum yearly spend required to waive-off renewal charges after the first year of use.

Recommendations

• Understand your spend pattern to choose the best credit card for you. Ex. For more spends on air-travel, opt for a card with travel benefits.
• Do not use multiple credit cards as it may become difficult to track expenses and one may end up overspending. Stick to 1-2 cards at max.
• Having add-on cards for family members would help to maximize the rewards/benefits offered.
• Track your expenses and transactions regularly. This would help to follow the budget as well as identify any frauds.
• Pay your dues in full before or on the due date. I’ve set up an auto-debit from my savings account and ensure that necessary balance is available.
• If possible, ask the card provider to set the payment due date within the first 1-10 days of the month. Usually, there is more money in our bank accounts during the initial days of the month.
• If there is a renewal-fee, continue usage only if the rewards offered by one year of use is significantly higher than the renewal charges. Else, there are a lot of available options to choose from.
• Do not share your credit card information, use strong passwords and change them regularly. Enable extra-verification features like OTP/security-code, avoid transactions while connected on public Wi-Fis, disable auto-fill of credit card information, ensure you only transact on websites with URLs starting with https://, shred or destroy any documents which have your credit card or transaction data. Also, read the Do’s and Don’ts from your card provider.

Summary
A credit card is a piece of plastic without a brain. It needs a disciplined master to maximize the benefits and avoid the downsides.

Taal Lake – Philippines.