Are you planning to have a credit card? Wait, and think a minute, is it really necessary for you? Have you thought about the advantages and disadvantages of a credit card? Do You know how to handle a credit card and its liabilities? All these types of questions must be in your mind before getting a credit card. A credit card must be used carefully if you do not care much about it, it might be disastrous for you and your short and long-term budget.
We are here with a comprehensive and informative guide that will help you realize the need for a credit card. In this article, we will cover all the required aspects that can affect your decision to have a credit card.
When You Should Have A Credit Card?
The decision to get a credit card must be taken carefully, If you do not plan and think of its needs, applications, liabilities, advantages, and disadvantages, a helpful credit card might turn into a devil that will bother you for a long time. Some factors decide whether you should have a credit card or not.
If you love shopping and frequently purchase different things, some banks offer you a good discount on their credit cards. These types of discounts are offered when you buy some expensive items like mobile phones, laptops, handy gadgets, etc.
Interest-Free Short-Term Loan
When you have a credit card, the bank offers you a particular period where you can spend a limited amount without any cost of interest. It means if you expend some money from this card and return it to the bank (deposit in credit card) then you are not required to pay any interest for this. This is the best offer that a credit card can feature. It assists you in purchasing anything without having money. A credit card is a blessing for you when you have to buy something and you do not have money.
Cashless Cum Money-Less Assistant
Lots of people do not like having cash with them, they like cashless transactions. Credit card has both abilities, they help you when you do not carry cash and when you do not have any money. It lets you expend money without charging any interest if you pay the amount in a given period.
To Hike Your Credit Score
If you are thinking of boosting your credit score, getting a credit card is a fantastic idea. Maintaining your monthly expenses and repaying them in time increases your credit score. For this, some credit cards are specially designed for boosting credit scores.
A person who daily expends through credit cards earns points and rewards for each payment. You can redeem these points and rewards for different uses like hotels, car fuels, various types of services, and many more activities. Some credit cards also offer you a cashback scheme.
Credit cards often come with built-in protections, such as fraud liability, purchase protection, extended warranties, and more. This can give you peace of mind, especially when making significant purchases.
Credit cards are widely accepted worldwide, making them a convenient payment method for international travelers.
If you’re a business owner or a freelancer, having a dedicated business credit card can help you separate personal and business expenses, making accounting and tax preparation simpler.
We have covered some of the points when you might need a credit card. A person who does not go through the above-mentioned conditions or any other similar condition where having a credit might benefit you is advised not to apply for a credit card. To understand more the credit cards, we should have a look at the advantages and disadvantages of credit cards.
Key Advantages of Credit Cards
Once you know the pros and cons of having a credit card, you can make much better decisions. We are here with 15 outstanding benefits of credit cards that you must check out.
Digital Payments: Credit cards simplify online shopping and subscription-based services, such as streaming platforms and monthly memberships.
Quick Checkout: Tap-and-go technology and contactless payments enable faster checkout in physical stores.
Building Credit History:
Credit Score Impact: Regular, on-time payments positively affect your credit score, which lenders and financial institutions use to evaluate your creditworthiness.
Loan Approval: A good credit history can lead to more favorable terms on loans, including lower interest rates.
Rewards and Cashback:
Tiered Rewards: Some cards offer higher rewards rates for specific categories like dining, travel, or gas.
Bonus Points: Periodic promotions can allow users to earn extra points for specific merchants or during certain timeframes.
High Limits: Some credit cards come with high credit limits, which can be a lifesaver in emergencies, such as unexpected medical bills or urgent car repairs.
Safety and Security:
Two-factor Authentication: Some cards offer added security layers, requiring additional verification for certain transactions.
Alerts: Real-time alerts notify users of potential fraudulent activity or unusually high expenditures.
Global Assistance: Some cards offer global emergency assistance, providing help if you lose your card while traveling.
Free Baggage: Certain cards come with perks like free checked baggage or priority boarding.
No Immediate Interest: Purchases won’t accrue interest until after the grace period ends, typically around 21-25 days after the billing cycle closes.
Automatic Extension: Some cards automatically extend the manufacturer’s warranty, potentially doubling the warranty period on qualifying purchases.
Claims: If an item you bought gets stolen or damaged within a certain period (often 90 days), the credit card company might reimburse you.
Rental Car Insurance
Collision Damage Waiver: This covers the cost of repairs from an accident. Some premium cards offer primary coverage, meaning it kicks in before your auto insurance.
Refund Difference: If you find a cheaper price after buying an item, you can claim the difference. This often requires submitting proof of the lower price.
Mobile Apps: Many credit card providers offer mobile apps that categorize and visualize your spending, helping you understand and manage your expenses better.
Currency Conversion: Many credit cards handle currency conversion automatically, making international transactions seamless.
Emergency Card Replacement: If you lose your card abroad, some providers offer expedited international card replacement.
Flexible Payment Options
Installment Plans: Some credit cards offer the option to convert big purchases into monthly installment plans, sometimes with zero or reduced interest.
Balance Transfers: Many cards offer low or 0% interest on balance transfers from other credit cards, allowing users to consolidate and manage debt.
All these benefits are not for everyone, each benefit depends on the nature of the card and the buyer’s conditions. So please make sure that there are no hidden charges instead of these benefits.
Disadvantages of Having a Credit Card
You have read the key advantages of credit cards but it is not enough for you. You must also read the possible disadvantages of credit cards.
High Interest Rates: Carrying a balance can lead to significant interest charges. If only the minimum payment is made, it can take years to pay off the debt, leading to a much higher total repayment amount.
Annual Fees: Some cards charge yearly fees, which might offset any rewards or benefits if the card isn’t used regularly.
Foreign Transaction Fees: Some cards charge extra fees for transactions made outside the card’s issuing country.
Late Payment and Over-limit Fees: Missing a payment or going over the credit limit can result in hefty fees and potential interest rate hikes.
Potential for Overspending
False Sense of Affordability: The convenience of credit cards can sometimes lead to impulse buying or spending beyond one’s means.
Credit Score Impact
High Utilization: Maxing out a card or having high credit utilization can negatively impact one’s credit score.
Late Payments: Delinquent payments get reported to credit bureaus and can severely harm one’s credit score.
Complicated Terms and Conditions
Hidden Clauses: Some credit cards come with complex terms that can be confusing, potentially leading to unexpected charges or loss of benefits.
Identity Theft: If a credit card’s details are compromised, it can lead to unauthorized transactions or full-blown identity theft.
Skimming: Credit cards can be skimmed at ATMs or gas stations, and the stolen information can be used fraudulently.
Potential for Bad Financial Habits
Minimum Payments: Paying only the minimum amount can lead to a false sense of financial security, prolonging the debt and increasing the total amount paid due to interest.
Cashless Reliance: Over-reliance on credit cards can make one less prepared to handle situations where only cash is accepted or when the card gets declined.
Expiration Dates: Some rewards or points can expire if not used within a certain timeframe.
Restrictions: There might be blackout dates for travel rewards or specific conditions to be met before cashback is awarded.
Credit Limit Reduction: If a card issuer perceives a risk (like if the holder frequently gets close to their limit), they might reduce the card’s limit, which can impact credit utilization ratios and, by extension, credit scores.
Interest Rate Increases
Variable APRs: Some cards have variable APRs, which means the interest rate can increase based on various factors, including late payments or changes in the broader financial market.
When You Should Not Have A Credit Card?
After reading the pros and cons of the credit cards, we think that you have a better understanding about it. You can decide now whether you should have it or not.
There are several circumstances under which a person might consider not having or using a credit card. Here are some situations when it might be best to avoid credit cards:
Poor Financial Discipline
If an individual tends to spend impulsively or struggles with budgeting, a credit card might exacerbate these issues. The convenience of a credit card can sometimes lead to overspending.
Existing Debt Problems
If someone is already grappling with significant debt, especially high-interest debt, adding a credit card to the mix can make the situation worse.
Inadequate Understanding of Credit Terms
If a person doesn’t understand how interest, minimum payments, fees, and other credit card terms work, they might end up making costly mistakes.
Young Adults without Financial Literacy
Young adults, especially students, are often targeted by credit card companies. Without proper financial education, they might accumulate debt early on, which can have long-term repercussions.
Tendency to Only Make Minimum Payments
If someone is prone to making just the minimum required payment, they’ll accrue interest rapidly, leading to much higher costs over time.
Lack of Steady Income
Without a regular income, it becomes challenging to pay off credit card balances. This can lead to debt accumulation and potential financial strain.
Going Through Emotional or Mental Health Challenges
Individuals dealing with severe emotional or mental health issues might make impulsive or ill-considered financial decisions. During such times, it might be best to avoid potential financial pitfalls like credit cards.
Recovery from Bankruptcy or Financial Hardship
After bankruptcy or significant financial setbacks, it might be best to focus on rebuilding financial health and stability without the potential pitfalls of credit card debt.
Avoiding Lifestyle Inflation
Some people find that having access to credit encourages them to live beyond their means, adopting a more expensive lifestyle. If keeping up with or outdoing peers is a concern, it might be best to steer clear of credit cards.
Unfavorable Credit Card Terms
In situations where the only available credit cards come with extremely high interest rates, fees, or unfavorable terms due to a low credit score, it might be better to avoid them and focus on improving one’s credit score first.
Preference for Simplicity
Some people prefer to keep their finances straightforward. Using cash or a debit card can make tracking spending easier and reduce the risk of debt.