Exploring Credit Cards: Advantages & Disadvantages
Exploring Credit Cards: Pros and Cons
What is a Credit Card?
In contrast to debit cards and interbank
transactions, credit card payments involve a deferred payment mechanism with
associated restrictions and bank charges. The credit card is equipped with a unique
number, brand name, magnetic strip containing personal data, and CVV number,
functions as a miniature loan. However, defaulting on payments on incurring expenses may lead to high-interest rates.
How Do Credit Card Companies Operate?
Major credit card companies like Mastercard, Visa, American Express, and Diners Club collaborate with banks to offer credit card services. These companies levy charges on banks and financial institutions for their support. Understanding the fees and charges associated with credit card transactions is crucial. According to RBI guidelines, consumers can choose a card based on their preferences, considering the fees associated with different companies.
Lessons:
(1) Consumers can select a card based on their preferences and associated fees.
(2) Banks often promote cards that benefit them the most; consumers should
research and negotiate annual fees.
Analyzing Credit Card Benefits:
While credit cards offer immediate payment solutions and security, consumers should carefully evaluate the associated benefits. In India, the issuance of approximately 8.2 crore cards resulted in transactions amounting to around 1 lakh 30 thousand crores. Studies show that enticing offers often lead consumers to indulge in non-essential spending, potentially causing financial strain.
(1) Considering rewards and cashback programs, consumers are encouraged to weigh the long-term implications of planned purchases against the lure of immediate benefits.
(2) Emphasizing the importance of responsible spending to avoid falling into debt traps.
(3) Few cards have accidental insurance or travel insurance
associated with them. Then it’s advisable to check is it really worth taking
rewards which only makes you habitual spenders. Insurance taken outside would cheaper.
(4) The rewards, cashback and coupons have certain expiry
date and to use those you spend more.
Key Questions: What shall be Credit card holders Focus??
(1) First-level thinking:
Someone using
first-level thinking might consider the immediate benefit of using a credit
card for a purchase. This could include convenience, earning rewards or
cashback, and the ability to defer payment until a later date.
This level of
thinking might overlook potential downsides, such as high-interest rates on
unpaid balances, the risk of accumulating debt, and the impact on one's credit
score if payments are not made on time.
(2) Second-level thinking:
A person employing
second-level thinking would consider not only the immediate benefits but also
the long-term consequences and broader implications of using a credit card.
They might analyze
their financial situation, evaluating whether they can pay off the credit card
balance in full each month to avoid interest charges. They may also consider
the impact on their overall budget and financial goals.
Second-level
thinking involves anticipating potential problems, such as overspending, and
planning for responsible credit card use to maintain a healthy financial profile.
Understanding CIBIL Score:
Credit cards are typically issued by banks based on the applicant's credit score, which considers factors like salary, timely loan payments, and credit history.
The CIBIL score, a 3-digit numeric summary of credit history, plays a crucial role in loan applications. Ranging from 300 to 900, a higher score increases the likelihood of loan approval. Maintaining a healthy CIBIL score involves timely payments, low credit balances, moderate credit applications, a mix of secured and unsecured loans, regular monitoring of joint accounts, and frequent reviews of credit history.
Choosing the Right Credit Card:
(1) Assess Your Spending Habits: Analyze typical spending patterns to match with card rewards.
(2) Consider Annual Fees: Evaluate whether benefits justify
the cost of annual fees. If holding multiple credit card, any increase in annual fee will make dent to your financial stability.
(3) Interest Rates: Understand and compare interest rates,
especially if carrying a balance.
(4) Introductory Offers: Look for 0% APR or bonus rewards but
be aware of terms post-introductory period.
(5) Rewards and Benefits: Compare cashback, travel rewards,
and additional perks offered.
(6) Foreign Transaction Fees: Choose cards without or less foreign
transaction fees for international travel.
(7) Credit Card Network: Ensure wide acceptance, considering
major networks like Visa, Mastercard, etc.
(8) Issuing bank and its Customer Service and Accessibility:
Check reviews for customer service quality and assess online/mobile
accessibility.
Taking these factors into account will help you find a
credit card that aligns with your financial habits and goals. Let me tell you it's often asked whether it is good or bad to hold credit card. It's how you use it to cater needs and requirements', moment you adopt first level of thinking, surely you would be calling for tension and problems, as you would be spending on non-essential.
How Banks makes Profit from Credit Cards:
Banks derive revenue from credit cards through various
(1) Annual fees
(2) late fees
(3) Charges for transferring money from credit cards to bank accounts, which is nearly 3-4 % per transactions.
Should You Hold a Credit Card?
Addressing the common query of whether holding a credit card is advantageous, the article emphasizes, on factors like
(2) Timely payments
(3) Settling the full amount
Avoiding minimum payment traps, are crucial practices for
individuals considering or already holding credit cards.
Please understand due to consumer negligence, missed payment
dates attract high-interest rates, often surpassing those on loans.
Remember never buy something if you don't have fund, thinking to repay in next few months, it will pull you into vicious web of debt and bankruptcy.
Update on credit card policy - Changes by Banking companies.
.
1. HDFC Bank Credit Card Changes: Effective Date: December 1, 2023.
Affected Cards: Regalia and Millenia credit cards.
(1) Change in Lounge Access for Regalia
(2) Lounge access is now based on credit card spending.
(3) Spend Rs 1 Lakh or more in a calendar quarter.
(4) Upon meeting the criteria, visit the Regalia SmartBuy page for lounge benefits.
(5) Avail up to 2 complimentary lounge access vouchers quarterly.
(1) Change in Lounge Access for Millennia
(2) Lounge access is based on credit card spending.
(3) Spend Rs 1 Lakh or more in a calendar quarter.
(4) Upon meeting the criteria, receive an SMS with a link for Millennia Milestone page.
(5) Avail up to 1 complimentary lounge access voucher quarterly.
2. SBI Card Changes:
- Change Date: Accrual of Cashback for Rent Payment transactions discontinued from January 1, 2024.
(1) SimplyCLICK/SimplyCLICK Advantage SBI Card
(2) From November 1, 2023, 10X Reward Point Accrual for EazyDiner reduced to 5X.
(3) 10X Reward Points maintained for online purchases at specified partners.
3. Axis Bank Credit Card Changes
- Affected Cards: Magnus and Reserve credit cards.
- Modifications: Changes to Magnus credit card benefits, annual fee, joining gifts, and revised terms for Axis Reserve Credit Card.
4. ICICI Bank Credit Card Rules:
(1) Effective Date for Lounge Access Changes: April 01, 2024.
(2) Lounge Access Modification:
(3) One complimentary airport lounge access by spending Rs. 35,000 in the preceding calendar quarter.
(4) Spends in the previous quarter unlock access for the subsequent quarter.
(5) Eligibility criteria for each quarter based on spending in the preceding quarter.
Disclaimer: Changes subject to bank policies, check official updates for accuracy.
Conclusion
Consider holding a credit card if its rewards match your spending habits. Responsible use, paying balances in full, can yield benefits like cashback or travel rewards. However, diligent budgeting is essential to avoid accumulating debt and incurring high-interest fees. Assess your financial situation and choose wisely based on your needs and discipline.
FAQS related to credit card.
Q: Are rewards and points taxable?
A: Generally, credit card rewards and points are not considered taxable income. However, specific situations may vary, and it's advisable to consult a tax professional.
Q: What are secured and unsecured credit cards?
A :
- Secured: Requires a security deposit and is typically for individuals with limited or poor credit.
- Unsecured: Doesn't require a deposit and is based on the cardholder's creditworthiness.
Q: Can we use a credit card at ATMs?
A: Yes, credit cards can be used at ATMs to withdraw cash. However, cash advances often have associated fees and higher interest rates.
Q: How to add and delete a credit card?
A: Credit cards can be added or removed from accounts through the issuer's website, mobile app, or by contacting customer service.
Q: Should there be a warning on the credit card for usage/non-sharing of OTP, etc.?
A: It's advisable to keep credit card information secure. While warnings on the card itself may not be common, it's important to be cautious and not share sensitive information.
Q: Do credit card points expire?
A: It depends upon card issuance conditions, some card reward does not expiry, some it need to be redeemed after certain period.
End of the Article.
Disclaimer
The information provided in this article, "Credit Cards: Usage, Benefits, and Pitfalls," is intended for general informational purposes only and should not be considered as professional financial advice. The author is not a financial advisor, and readers are encouraged to consult with qualified professionals for personalized advice tailored to their specific financial situations.
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