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Credit cards have their advantages and disadvantages. And Credit cards have become an essential part of our lives. Ease of credit, discounts, offers, and rewards, and its role in building a credit history all have contributed to its rising popularity. It isn’t astonishing to know that there are more than 97.9 Million active credit cards in India as of December 2023. That’s more than the population of most countries, including the UK, South Korea, and Canada. Despite such a high number, this figure is barely a small fraction of the working-age population in India.
Several developments are happening in this space to encourage people to use credit cards. Some of them are innovations, changes in technology, smooth onboarding of new customers, personalised offers, and better mobile apps. These efforts have paid off as the credit card industry has witnessed a compound annual growth rate (CAGR) of 20% in the last five years. Credit card spending also reached the highest-ever of Rs. 1.37 lakh crore in March 2023.
Several new banks entered the credit card space in 2022, and the credit card industry is expected to grow at more than double the speed in the next four years. As credit card usage is growing, it is important to know how to use your credit cards carefully. The following sections will explain in detail the advantages and disadvantages of credit Cards.
Credit Card Advantages and Disadvantages
| Advantages | Disadvantages |
| Convenience – Easy to carry and use. Some credit cards are available virtually. | Debt accumulation – Easy to overspend on purchases |
| Emergency funds – Useful in emergencies where liquid cash isn’t handy. | Interest rates – High interest rates are levied if balances aren’t paid back. |
| Rewards – Earn reward points, cashback, or travel miles. | Annual fees – Some cards charge yearly fees. |
| Builds credit history – Helps establish credit. | Fraud risk – Vulnerable to identity theft and fraud. |
| Purchase protection – Offers buyer protections for transactions | Impulse purchase – Temptation to impulse buy products |
| Insurance benefits – Certain credit cards offer medical, travel, and purchase insurance over products and services | Overspending – Easy to lose track of expenses and spoil the budget |
| Grace period: Interest-free period if paid in full before the due date | Cash advance fees – Very high fees for cash withdrawals |
| Accepted worldwide: Widely accepted for transactions by merchants across the globe | Impact on credit score if misused or if you miss out on repayments |
| Online shopping – Convenient for online purchases | Minimum payments – Can lead to long-term debt. |
| You can build rewards and perks over time | Dependency – Reliance on credit can lead to financial stress |
What Are the Advantages of Credit Cards?
Credit cards are a very useful financial tool. Despite what all the personal finance experts say, credit cards are very beneficial and help manage your finances better, provided you use them responsibly. Following are some of the benefits why credit cards are considered good.
Credit Card Offers and Incentives
Credit cards are packed with incentives such as discounts, cashback, and offers. Every time you use a credit card, you accumulate reward points which translate into air miles, cashback, vouchers, and offers. You can use these incentives wisely to cover your expenses, flight tickets, and entertainment.
Build Credit Score
As a taxpayer, it is important that you have a credit score. In case you don’t have a credit score, one way to build it is through a credit card. Using credit cards effectively will help you build and improve your credit score. Having a good credit score will help you get loans easily with higher credit limits at low interest rates. Moreover, you will have higher bargaining and negotiating power than the ones with a low credit score. So this means if you want to purchase a car or home, you will be able to do it faster as your loan application would be approved easily. Moreover, you can also bargain to get a better price for the asset you are purchasing.
Track Expenses
Credit cards are a great way to track your expenses. They record all the transactions you do with them. At the end of the month, it sends you a statement through which you can make a budget or use it for tax purposes. Moreover, every time you spend using a credit card, you will be sent an alert regarding the amount spent and the limit left for you to spend.
Easy Access to Credit
This is possibly the biggest advantage of a credit card. It gives you easy access to credit as a credit card works on deferred payments. So, this means you can buy now and pay later. This comes in very handy in case of an emergency or unexpected expense. Moreover, your credit card lets you convert your unpaid bills into EMIs (equated monthly instalments) through which you can make big purchases such as television, refrigerator, and mobile phone and not create a dent in your savings.
Interest-free Credit
Credit cards come with an interest-free period during which the banks do not charge any interest on the credit limit you used. This period typically lasts for 45-60 days. If you pay the balance in full during this grace period, you need not pay interest on the money you used.
Easy Loan Approvals
You can also apply for personal loans through a credit card. Once you apply for a loan, the money will be credited to your bank account in no time. Having a good credit score and credit history will also help you in securing such loans immediately.
What Are the Disadvantages of Credit Cards?
There are always two sides to a coin. Although credit cards are an excellent financial tool, overusing them can be very harmful. They can even put you in a never-ending debt spiral and harm your finances if you aren’t careful when using them. Below are some of the reasons why you should be careful when using or applying for a credit card.
High-interest charges
If you fail to pay your credit card bill before the due date, the amount is carried forward, and interest is charged to it. Credit card interest rates can be as high as 3% per month, which aggregate to 36% per annum. If there is any unpaid amount, the interest aggregates and can become a burden on you.
Credit Card Fees
Even though credit card looks like a simple instrument, they have a lot of hidden costs which often go unnoticed by you. Some of the common costs are joining fees, renewal fees, and processing fees. If you end up paying your bill late, the banks charge a penalty and late payment fees on top of the interest on the bill amount. Sometimes, if you repeatedly pay your credit card bills late, banks can reduce your credit limit, which will affect your credit score.
It Can Harm Your Credit Score
Once you delay your credit card payments, you will end up in a never-ending spiral of debt. You will be charged an interest (which is, by the way, exorbitantly high) on the due amount, and on top of this, you will be charged late fees and penalties. Although you end up repaying after a few months, the damage is already caused as this becomes a remark on your credit history, and your credit score falls. A bad credit score can result in high-interest loans and lower credit limits.
Minimum Due Trap
Credit card companies and banks confuse people by telling them that they need to pay only the minimum due amount to continue using their cards. Most users believe the minimum due is their monthly bill and don’t realise the debt trap they are falling into. Banks surely allow you to use the card if you pay the minimum amount, but they charge interest on the rest, which aggregates to become a huge amount in a few months. Moreover, users might also think their bill is very low and end up overusing the card.
Repeated Calls from the Recovery Team
Banks do send constant reminders to credit card users to pay the bill amount. If you fail to do so, they charge interest and a penalty. However, after three months, they call you continuously to recover the dues. Repeated calls can be very annoying and can also increase your stress levels as you are constantly reminded of your debt.
Credit Card Fraud
Credit card frauds are quite common. They have been in existence right from the time credit cards were introduced in the market. Although banks have been taking steps to improve fraud prevention systems, hackers and fraudsters have found new ways to steal money. The cardholder is always under stress and tension every time he shops online or swipes in a store.
Easy to Overuse
The biggest harm credit cards can do is break your financial discipline. With every swipe, when you don’t see the bank balance going down, you tend to spend money recklessly, sometimes more than what you can afford. Credit cards have a tendency to tempt you with rewards and offers. Hence you end up using the card for all kinds of expenses, making you lose track of your spending. This will land you in a never-ending spiral of debt, and you might not be able to save money for the future.
Do you really need a credit card?
After knowing the benefits and disadvantages of credit cards, it’s up to you to assess whether you need a credit card or not. While the choice is very personal, you can decide after looking at some scenarios where you might need a credit card and where you don’t.
When do you need a credit card?
In case of an emergency:
A credit card acts as a backup in times of emergency when you don’t have enough funds in your savings account. However, this can be avoided by having an emergency fund in place. So, let’s say your car has broken down, and the repairs are costing you a lot. In such a case, a credit card can come in handy, and you can easily convert this expense into an EMI if you can’t afford it. Alternatively, you can dig into your emergency fund and pay for the car repairs, and save a certain amount monthly to replace it.
For incentives:
Credit cards offer a lot of incentives, such as reward points, cashback, and discounts. Using credit cards to avail of such incentives is a clever way to save money. Some credit cards offer discounts on certain purchases on e-commerce websites or at movie theatres. You can use these cards if you are a movie buff.
Credit score:
Credit cards can help build your credit score. So, if you are a person with no credit score, credit cards are the easiest way to build one.
How to use a credit card in the right way?
Never skip a payment:
Missing a credit card payment can result in penalties and late fees and can also harm the credit score. Therefore, ensure that you never miss a payment, even if you can afford to pay only the minimum due.
Pay the balance in full:
In case you don’t pay the credit card balance in full, you will have to pay interest on the balance amount. The interest charges can be as high as 36% per annum. If you miss even one payment, you might pay a lot more than you owe. Hence it is best to spend only what you can afford to pay. This way, you can avoid interest charges.
Use the card for wants and not needs:
Always use a credit card for planned purchases or for emergencies. Don’t use it for your wants. A credit card should be a loan for yourself that you must pay back as soon as possible. This way, you can avoid overspending and also avoid interest charges.
Avoid impulse buys on credit cards:
Every time you go out of control and shop impulsively, avoid taking out your credit card. Use a debit card instead. This way, you will limit your impulse buys and avoid damaging your financials.
Limit your credit usage to 30%:
Always keep your credit card utilisation ratio below 30%. By doing so, you can improve your credit score, pay back the balance on time, and also manage your finances in a better way. If your credit limit is Rs 1 lakh, use only Rs 30,000 (30%) to ensure your credit history is good and improve your credit score.
When to avoid applying for a credit card?
Following the herd:
Do not take a credit card if you feel left out or want to follow others. A credit card is a useful tool but can do serious financial damage. Just because others are using it doesn’t mean you have to do it too.
Doing it only for rewards:
If you are taking a credit card only for the rewards without doing the math, then you probably shouldn’t. Many credit cards charge a processing fee of 2-3%, negating the rewards you get from it. So, check the processing fee before taking a card.
Who Should Get a Credit Card:
- Stable income individuals: People who have a stable source of income are better suited for credit cards. This ensures they can make timely payments and manage their balances effectively.
- Building Credit: For individuals with little to no credit history, responsibly using a credit card can be a valuable tool to establish and build credit. This is quite a significant approach to build credit score for buying a car or home on a loan.
- Capability to pay balances in full: People who have the discipline to pay off their credit card balances in full each month can benefit from rewards programs without accruing interest charges.
- Emergency preparedness: Having a credit card can serve as a financial safety net during emergencies when immediate funds are needed.
- Travelers: Certain credit cards offer travel rewards, such as airline miles or hotel points, making them advantageous for frequent travelers.
- Budget-conscious people: Credit cards can help individuals track expenses and make managing finances more efficient, especially when using features like spending alerts and budgeting tools.
- Online Shoppers: Credit cards offer security and protection for online purchases, making them a preferred option for those who frequently shop online.
Who Shouldn’t Get a Credit Card:
- People with unstable income: Those who don’t have a stable income source may struggle to make timely payments, which may lead to debt accumulation and financial stress.
- Impulsive spenders: People who are prone to impulse buying may find it difficult to control their spending with a credit card, leading to debt issues.
- Overspending: Individuals who tend to spend beyond their means and limits should avoid credit cards as they may easily accumulate debt and put them in credit risk list by the lenders.
- People who are already in debt: If someone is already struggling with debt and repayments, adding a credit card can exacerbate the problem and lead to a vicious cycle of debt.
- People who are clumsy with managing payments: Those who struggle with managing bills and payments may find it challenging to keep up with credit card payments, leading to late fees and negative impacts on credit scores.
- Young ones without financial literacy: Young adults who lack financial literacy and may not fully understand the responsibilities and consequences of using credit cards. They should wait until they are better informed before obtaining a credit card.
- People susceptible to fraud: Individuals who are not diligent about protecting their personal information and are susceptible to frauds should be cautious with credit cards as they can be a target for identity theft and unauthorized transactions.
Credit cards aren’t bad for your financial health. In fact, a credit card can be a useful tool to reduce your expenses by taking advantage of the rewards. However, you must be careful while choosing a credit card. Check the processing fees, rewards and offers, and terms and conditions before applying for a credit card. Once you get a credit card, use it wisely to avoid unnecessary fees and interest payments. Hope these advantages and disadvantages of Credit Cards will help you decide your next credit card.
Also Read: Difference between Credit Card and Debit Card
Frequently Asked Questions
Is credit card good or bad, and why?
Credit cards are an excellent financial tool to manage your budget and expenses, build a credit score, and get easy credit. However, anything in excess is harmful. So don’t overuse your credit cards and use them optimally to take advantage of them.
Why do people say credit cards are bad?
Credit cards are not bad. However, this misconception is mainly due to the fees, charges, and interest rates on credit cards that arise from late payments or not paying the balance on time. Some cards have high processing fees, late fees, and penalties. On top of these fees, the interest charges on the unpaid balance are exorbitantly high. Hence most consider credit cards as bad. However, if you pay off your balance on time, you can avoid all these expenses and get rewards and cashback.
Are credit cards bad for poor people?
No, credit cards aren’t bad for poor people. However, taking a credit card without having enough savings isn’t advised. It is always better to have an emergency fund in place before you start using a credit card.
Is it OK not to have a credit card?
It is completely fine not to have a credit card. You can use cash or debit cards for your purchases instead of credit cards. In case you want to build a credit history, you can always do so with other kinds of loans, such as car loans, home loans, etc.
Can you live without a credit card?
A credit card was first introduced in 1958. Prior to that, there was never a concept of a credit card. So, if people lived without a credit card before, you can also live with it now. You can build your credit score through other kinds of loans instead of using a credit card for a good credit score. Many payment apps and wallets are offering cashback on payments and money transfers. So you can get rewards without using a credit card.
