The Growing Culture of Credit Cards in India

The use of plastic money and digital payments has seen a noticeable increase over the past couple of years. This is also because the government itself has been trying to migrate to a cashless economy. Among the variety of choices for cashless payments is a credit card. The credit provided on this card is classified as an unsecured loan. And if used correctly, a credit card can function like an interest-free loan.

Below-given are some of the features of credit cards in India:

• It is a card issued by a bank that comes with a preset limit.
• Unlike a debit card, it is not linked to any savings account and no money is debited from an account upon using the card.
• The card issuer allows users to spend what is essentially borrowed money; the users are required to pay this money back by a designated date every month.
• This date depends on the credit cycle of the issuer and an interest-free period that it offers.

How to Clear Credit Card Dues?

Below-provided are ways to clear credit card debts:

• Users can make a minimum payment every month, but then heavy interest and fines are levied on the unpaid balance amount which gets charged in the succeeding month.
• Unless the users pay the complete outstanding balance and the charged interest, the heavy interest and fines keep getting levied and continue to increase the amount owed to the credit card issuer.
• Users can completely avoid paying the interest if they clear all their dues every month.

Know the Pros and Cons of Credit Cards in India

In order to enhance understanding towards credit cards, here are a few associated pros and cons associated to those:

Pros of Credit Cards

1. Easy access to credit: Credit cards are possibly the easiest way to access credit. Even among unsecured loans, it is much easier to get a credit card than other forms of loans. Moreover, they tend to be more transparent in their functioning as well as charges. You also need to be aware that not all debt is bad for you. Find out which debts are okay to have here
2. Interest-free period: These cards offer an interest-free period on the outstanding credit balance. During this period, no interest is levied on the balance up until the last payment due date. In other unsecured loan formats, interest is charged on any outstanding amount for the entire period.
3. Help build credit history: With credit cards, users can build a credit history which helps them in securing bigger loans sometime in the future. A good credit history places an applicant in a better position to get a loan than an applicant with no history at all.
4. More secure than cash: Even after unfortunate incidents of fraudulent transactions, credit cards are more secure than cash. Theirs is no way to get back lost or stolen cash. Meanwhile, credit cards offer a layer of security in the form of PIN and OTP codes and there’s a possibility of getting fraudulent transactions reversed by the issuer if reported early.
5. Benefits and reward points: Reward points and cash backs are a common feature among most credit cards. Thus, one can not only make use of the interest-free period but also earn reward points for spends. Sometimes issuers tie-up with companies to offer co-branded cards, which provide benefits for purchases on the companies’ products and services.
6. Spread purchases out: Sometimes, a consumer may want to purchase an expensive product but may be unable to make the complete payment at one go. Though he can make use of the EMI facility offered by the store which is offered with such large purchases, it comes along with high rates of interest. If this purchase was made via a credit card, the consumer would be able to convert the amount into EMIs at a relatively small or sometimes no rate of interest.
7. Purchase protection: Some credit cards offer insurance on purchases that allow claiming purchases on lost or stolen cards.

Cons of Credit Cards

1. High cost of borrowing (and other charges): Credit cards are great until one misses a payment or does not pay the full amount due. If this happens, they become much more expensive than any other unsecured loan. Missing payments frequently is detrimental to one’s credit score as well which hampers the chance of securing a loan in the future. Penalties on missed payments are also large.
2. The minimum due fallacy: All credit card statements come with a ‘minimum due’ amount. Users tend to misconstrue this as the only amount that needs to be paid with the rest to be paid later. This is actually the least amount that a user is expected to pay; any unpaid amount from the total outstanding attracts penalties and interest rates are not paid by the due date.
3. Applying for too many can hamper credit score: If an individual applies for too many credit cards and fails to get any, this becomes hurtful to the credit score as potential lenders infer a problem with the credit profile or history of such a user. Holding many cards but not using them well may also hurt the credit score.
4. May lead to overspending: Given that the money being spent is not deducted from one’s savings account, credit cards may lead to overspending. Thus, having a firm grip on spending habits is essential for keeping the outstanding amount under control. Users should remember that they will need to pay the entire amount spent on the card to the issuer in the near future.
5. Potential for fraud: The advancement in technology has provided a shot in the arm to digital payment modes. However, it has also opened up the possibility of fraud. Users should ensure that they do not provide sensitive information like their credit card PIN, OTP, or CVV number to anyone. Bank officials do not ask for this information; the only ones who seek this data are fraudsters. Failing this, credit cards can turn to be a massive headache for a user.

To Conclude

With the increase in the use of credit cards, some questions regarding its benefits and challenges have come up. People contemplating the use of these cards are trying to assess the instruments the right way so that they can understand how to make the most of them. Go through the above-mentioned pointers about credit card, their uses, with pros and cons. These will help you to get to know about this financial product better.

Author Bio

Meet Prateek Goel aka ‘Teek’, he’s an avid traveler and has been investing in the stock markets since 2006. He has beaten the NSE/BSE on a consistent basis. At the age of 24, he was also featured in India Today for his expert insight on gold trading and having more than 150% returns just trading gold. He has an MBA from a top school in the US, and has been passionate about this for more than 10 years. His vision is to increase the % of Indian young millennials who invest from 3% to close to 50%, and he co-founded investeek.com to help with that. Reach him at askteek@investeek.com