Credit Card Meaning
A credit card is a card which is made of plastic and it allows the cardholder to make payment for various expenses up to a pre-specified limit as set by the financial institutions which have issued the card. Credit cards are basically buy now pay later product. Hence for example if you have been issued the credit card with a limit of $50000 then you can make purchases on credit up to $50000 and repay it according to your convenience within a stipulated time as fixed by the financial institution. They can be used for making the small payment like buying groceries from the supermarket or filling gas in your car and at the same time they can be used for making big purchases like buying mobile phones, furniture, televisions and so on. Given below are the advantages and disadvantages of credit cards-
Advantages of Credit Card
Purchasing Power and No Need to Carry Cash
The first and foremost advantage of using the credit cards is that one does not has to carry cash and hence in a way it makes it convenient for an individual to go or travel cashless without worrying about the risk associated with carrying cash. It increases the purchasing power of the customer because one can purchase beyond his or her income using the credit cards.
Make Use of Billing Cycle
Another benefit of credit cards is that there is a billing cycle in credit cards implying that if an individual repays the amount within that period then no interest is charged. So for example, if the billing cycle is 60 days than one is not charged any interest for 60 days after the payment made through credit card, here an individual can repay the amount before 60 days and effectively he or she has used the money for 2 months without paying any interest.
Additional Discounts and Record Keeping
Another pro of using a credit card is that one gets various benefits like additional discounts on e-commerce websites when one makes payment through credit card, incentives offered by the financial institution when one uses the credit card more and so on. It also helps in keeping track of one’s expenses as one gets the credit card statement monthly from the financial institution or bank which has issued the credit card.
Disadvantages of Credit Card
Overspending Due to Higher Limit
The biggest con of using the credit cards is that one tends to overspend and the same benefit of an increase in the purchasing power can lead to a problem for the consumer as he or she will spend beyond the repaying capacity or income of the individual leading to mounting of debt for the consumer.
Higher Rate of Interest and Annual Charge
Another disadvantage of credit cards is that if one defaults on the payment than the rate of interest on the outstanding amount is very high and if one does not repay the installment for the long period then it can even result in the bankruptcy of an individual. Besides credit cards also have an annual charge which for those users who do not use credit cards much can be a negative point.
Prone to Fraud
A major con of credit card is that they are prone to frauds and also they can be stolen and if you have higher credit limit than the scope of financial loss due to credit cards fraud is very wide and hence one should keep this limitation also in mind before applying for credit card.
As one can see from the above that credit card has pros as well as cons and any individual thinking that credit card will solve all the financial problems should avoid that misconception and look at the disadvantages also before applying for new credit card.