The bright and dark sides of using credit cards
Contrary to popular belief, I overtly disagree with this question — “should I own a credit card?”
My take is — if you are eligible for one, then, you should absolutely own one.
It is arguably the safest method of payment. It gives you an easy way out of identity or card theft — all you gotta do is report the card stolen and restrain on the payment. Can you do this on a debit card easily? I don’t think so. Your savings bank account will be frozen until the investigation, and you won’t have access to your money.
You can use your money more efficiently and safely by putting it in money market instruments earning interest while you use the credit card to make purchases. While you are making these purchases on your credit, you are simultaneously building your credit score. A good credit score is important to avail future, larger loans — student loan, home loan, vehicle loan among others without any hassle at a relatively cheaper rate of interest since you will be assessed to be of lower risk to the lender (bank).
In addition, some credit card providers also give you an option of converting your large payments into a certain period (3 months or 6 months) interest-free (0%) EMI which gives you additional time to make payment.
Having said this, if these facilities are misused, you can get into debt traps if you don’t use your credit card properly. The only ONE thing you need to do while you own a credit card is to PAY ON TIME. Otherwise, a penalty interest rate is charged by the credit card companies that can be as high as 2%-4% per month which is 48% per annum on the higher side. The image above will help you understand the extent of interest charged if you miss a payment. And it also affects your credit score. If you find yourself in this situation, then, speak to the credit card company if you can avail the option of converting this into a personal loan. You might save a lot of money on interest payments.
Making minimum payments on your credit card bill also affects your credit score and not to forget the exorbitant charges levied on the remaining part which are not paid after the interest-free period. Paying the minimum due amount will only save you late payment charges (these charges vary from bank to bank and payment outstanding).
As long as you use your credit card judiciously, you can avoid unnecessary high-interest payment situations and enjoy its benefits — cash backs, reward points, frequent flier miles, universal acceptance etcetera.
