A credit card provides a line of credit which can be used to make payments. It is different from a debit card in the fact that when you use a debit card, the money gets debited from your bank account directly, whereas a credit card gives a line of credit which is paid off on a monthly basis.

Indian Context

In India, in the past decade, there has been a surge in the number of credit card users, with banks, both private and public, ranging from Kotak Mahindra Bank to State Bank of India offering various types of cards. With an improvement in technology, the usage of credit cards has increased at a rapid rate. Payments for almost everything are now online. Due to demonitisation, which led to insufficient currency flow, citizens turned to cards to keep up with monthly purchases. In January 2018, according to the Reserve Bank of India, 36.2 million credit cards were being used.

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Cash v/s Card

The first question that arises is why go through the troubles of getting a credit card when you can use cash for just about everything? Cash is accepted everywhere, it’s tangible and you don’t have to pay interest on it. While these are all valid points, credit cards provide a whole different meaning to payments. They allow you to keep a track of transactions, make large purchases, provide benefits like reward points and discounts and are very useful when you have to make sudden payments.

Pros And Cons

Though the shiny plastic may seem tempting and extremely sensible to have, it is important to look at both sides of the story. And if you do decide to get a credit card, it is imperative to know the best safest way to use it. When deciding to get a credit card it may help to know both the pros and the cons of having one.

Pros of Having a Credit Card:

1. Deferred Payment:

The biggest plus point of a credit card is the way it functions. Deferred payment allows you to purchase something now, and pay for it later. This provides the cardholder with a simplified access to credit. Unlike a debit card, your bank account will not be debited every time you use the credit card.

2. Easy Procedure:

The procedure of applying to a credit card is much easier now than it was in 2008. Banks are much more eager, as well, to provide their account holders with credit cards.

3. Credit History:

When using a credit card, you create a line of credit. The bank receives a full history of your payment schedule and your usage. A proper credit history may make it easier for a potential borrower to get a loan from the bank.

4. Record of Usage:

A credit card statement comes at the end of every month, providing a detailed record of all the payments made, the available credit and outstanding on your card.This can be extremely helpful when outlining a budget. To make matters easier, the bank sends an SMS or email to the card user every time it is swiped, ensuring not only a record but also a security measure against theft.

5. Incentives:

Today, credit cards provide various incentives and offers. Banks advertise their cards on the basis of these incentives. Offers include discounts, cash back and reward points which can be later used to make purchases like airplane tickets.For example, Kotak Mahindra Bank offers a PVR Gold Credit Card, the use of which ensures the cardholder 24 free tickets at PVR Cinemas all year round.

6. EMI facility:

Another advantage of using a credit card is the EMI or equated monthly installments facility. When making large purchases, like a television or a laptop, credit card users can opt for the EMI facility, and pay off the purchase in monthly installments at decent interest rates.This way the buyer is not forced to pay the lump sum and does not put a dent in his bank account. Online shopping sites like Amazon and Flipkart provide EMI options, making purchases through a credit card all the more easier.

7. Interest-Free Period:

Credit cards have an interest free period of about 45-60 days, during which you are not charged interest on outstanding credit, as long as the due balance is paid off on payment day.

8. Emergency Payments:

A credit card is very useful when you have to make large payments that appear out of the blue. For example, in case of sudden medical expenses, a credit card can come very handy.

9. Protective Measures:

CPP India and OneAssist provide protection against theft or damage to the credit card, including 24 hours call service to block lost or stolen cards, credit card insurance and assistance in replacement of the card.

10.  Foreign currency transactions:

Having a credit card reduces the hassle of carrying and converting cash abroad. Though they may charge a higher rate of interest, credits cards are way easier to use than actual foreign cash.

Though the advantages are many, there are some cons of having a credit card that must be taken into consideration before applying for one:

Cons of Having a Credit Card:

1. High-Interest Rates:

Banks charge a significant interest rate on credit cards, at an average of 3% per month. Bills not paid are carried forward to the next month and the cardholder is levied with fines and charges.

2. Overspending:

The ease with which a credit card can be used and the option of having more than one, makes it very easy to go above your limit. Since you cannot actually see the money being deducted from your bank account, it becomes tempting to buy more than your income can handle.

3. Debt:

Overspending can lead to debt. Your income can cover only a certain amount of interest payments and spending over the limit can lead to an inability to pay due bills on the card.

4. Invisible costs:

With a credit card come a host of hidden costs, penalties, fines, and fees. Though the system may seem straightforward, a lot of charges like taxes and fees like joining fees and late payment fees are levied, racking up the expenses.

5. Fraudulent Practices:

The same technology that makes credit cards so easy to use also makes fraud possible. With cybercrime on the rise, it is easy to procure a credit card number and use it to make large purchases, without the cardholder finding out until the bank statement arrives.

Factors To Consider

The pros of having a credit card certainly outweigh the cons. However certain factors must be kept in mind when choosing the right credit card for yourself:

1. Income:

Your income is the most important parameter when applying for a credit card. Your income is an indication of your spending and repaying capacity. Someone with an income of, say, 50,000 rupees per month would be more eligible in the bank’s eyes than someone with an income of 25,000 per month.

2. Credit History:

After income, your past credit history is very important. The bank checks with CIBIL to know of any past loans and other credit information. Your past credit history is an indicator of your future credit use.

3. Relationship With the Bank:

It’s always advised to issue a credit card from the bank you already have an account with because a previous relationship with the bank makes the process slightly easier.

4.Interest and Charges:

It’s good to have all the information regarding the interest rates and charges that will be levied on the card. Ensure GST charges are levied appropriately. Pick a card that is best suited to your income and budget needs.

Guidelines To Safe Credit Card Use

Using a credit card does not have to be cumbersome. Here are some guidelines you can follow in ensuring a safe and profitable use of a credit card: 1.  First and foremost, when applying for a card, always read the fine print. When caught up in the process, it is easy to ignore the small details. However, it is the small details that carry the most information. 2.    Create a budget according to your income and expenses and stick to it. Lack of self-control and a credit card are a bad combination. Make a detailed budget for your card usage and ensure that you stick to it and not make impulsive purchases. 3. Never miss a card payment. Missing a card payment begins the cycle of interest and debt which is very difficult to get out off. 4. Avoid getting multiple cards, since it increases the temptation to make purchases and becomes difficult to pay back. 5. Use the EMI facility for large purchases. 6. Regularly check your credit limit and try to keep at least 40% of it for emergencies. 7.Always read your credit card statement thoroughly. Inquire about any additional charges or payments made. 8. Make sure your credit card information is well guarded. Keep a proper track of your cards.

FAQs

1. How are debit and credit card different? Using a credit card is like getting a short-term loan that you have to pay off at the end of the month with interest. On the other hand, using a debit card subtracts money straight from your bank account without interest.

2. How do you know you are eligible for a credit card? Eligibility varies according to the bank, but some common criterion includes: ●     Eighteen years and above only ●     Having a valid Indian address ●     Having a regular salary or being self-employed ●     Meet the minimum income requirement

3. What is the CVV number on the back of the card? CVV or Card Verification Value is a 3 digit code that helps verify the credit card during online transactions.

4. What are the different types of credit cards? Broadly, credit cards can be divided into two types: ●     Standard credit card: This has no annual fee and is used for general purposes. ●     Specialized credit card: This is for specific purposes including providing dining and travelling benefits.

5. How is the credit limit decided? The credit limited is decided by the card issuer on the basis of several factors including income, repayment abilities, customer relation and profile and the credit history provided by CIBIL.

6. Can the credit limit be increased in the future? Yes, it can be. You may request the bank to do so. After examination of additional documents like a declaration of income and wealth and examination of past credit and repayment history, the bank may decide to increase the credit limit.

7. What do you do if a card is lost or stolen? The first thing to do is to report the card stolen or lost with the bank so it may be blocked and not used by unauthorized parties. Then the procedure to replace the card must be initiated.

8. What is Minimum Payment Due? It is the minimum amount that has to be paid before the due date to avoid being charged late fees. It is generally 5% of the total amount. It is advised to not just pay the minimum amount, but the entire amount due.

9. What are the charges that can be applied on a credit card? Some important charges which can be levied are joining fees, annual fees, service tax, late payment charge, cash withdrawal charge, over-limit charge.

10. What is an annual fee? It is a yearly fee charged for the use of a card, and the fee amount varies from card to card. Sometimes it may be waived according to bank policy.

11. What is the over-limit charge? An over-limit charge is levied when the card user goes above the given credit limit.

Conclusion

When it comes to deciding whether or not you need a credit card, all the above factors, pros and cons must be kept in mind. A credit card is a huge responsibility. However, its benefits cannot be denied. In the current economic climate, with issues of GST and demonetization, it’s imperative to take all these points into consideration while making a decision. Happy investing! Disclaimer: The views expressed here are those of the author. Mutual funds are subject to market risks. Please read the offer document before investing.

Disclaimer: the views expressed here are of the author and do not reflect those of Groww.