Exploring Credit Cards: Advantages & Disadvantages (2024)

What is a Credit Card?

Also called Mini Loan.A credit card, often referred to as "plastic money," facilitatesinstant payment for purchases. Wecan say its "Mini Loan", givenfor specificduration, Incase payment is defaulted bank charges High Rate of Interest which may be 30-40% annually.

In contrast to debit cards and interbanktransactions, credit card payments involve a deferred payment mechanism withassociated restrictions and bank charges. The credit cardis equipped with a uniquenumber, brand name, magnetic strip containing personal data, and CVV number,functions as a miniature loan. However, defaulting on payments on incurring expenses may lead to high-interest rates.

How Do Credit Card Companies Operate?

Major credit card companies like Mastercard, Visa, American Express, and DinersClub collaborate with banks to offer credit card services. These companies levycharges on banks and financial institutions for their support. Understandingthe fees and charges associated with credit card transactions is crucial.According to RBI guidelines, consumers can choose a card based on theirpreferences, considering the fees associated with different companies.

Lessons:

(1) Consumers can select a card based on their preferences and associated fees.

(2) Banks often promote cards that benefit them the most; consumers shouldresearch and negotiate annual fees.

Analyzing Credit Card Benefits:

While credit cards offer immediate payment solutions and security, consumersshould carefully evaluate the associated benefits. In India, the issuance ofapproximately 8.2 crore cards resulted in transactions amounting to around 1lakh 30 thousand crores. Studies show that enticing offers often lead consumersto indulge in non-essential spending, potentially causing financial strain.

(1) Considering rewards and cashback programs, consumers are encouraged toweigh the long-term implications of planned purchases against the lure ofimmediate benefits.

(2) Emphasizing the importance of responsible spending to avoid falling intodebt traps.

(3) Few cards have accidental insurance or travel insuranceassociated with them. Then it’s advisable to check is it really worth takingrewards which only makes you habitual spenders. Insurance taken outside would cheaper.

(4) The rewards, cashback and coupons have certain expirydate and to use those you spend more.

Key Questions: What shall be Credit card holdersFocus??

(1) First-level thinking:

Someone usingfirst-level thinking might consider the immediate benefit of using a creditcard for a purchase. This could include convenience, earning rewards orcashback, and the ability to defer payment until a later date.

This level ofthinking might overlook potential downsides, such as high-interest rates onunpaid balances, the risk of accumulating debt, and the impact on one's creditscore if payments are not made on time.

(2) Second-level thinking:

A person employingsecond-level thinking would consider not only the immediate benefits but alsothe long-term consequences and broader implications of using a credit card.

They might analyzetheir financial situation, evaluating whether they can pay off the credit cardbalance in full each month to avoid interest charges. They may also considerthe impact on their overall budget and financial goals.

Second-levelthinking involves anticipating potential problems, such as overspending, andplanning for responsible credit card use to maintain a healthy financial profile.

Credit card holders can benefit from adopting a second-levelthinking approach to ensure responsible and informed use of their credit cards.

Understanding CIBIL Score:

Credit cards are typically issued by banks based on the applicant's creditscore, which considers factors like salary, timely loan payments, and credithistory.

The CIBIL score, a 3-digit numeric summary of credit history, plays a crucialrole in loan applications. Ranging from 300 to 900, a higher score increasesthe likelihood of loan approval. Maintaining a healthy CIBIL score involvestimely payments, low credit balances, moderate credit applications, a mix ofsecured and unsecured loans, regular monitoring of joint accounts, and frequentreviews of credit history.

Choosing the Right CreditCard:

(1) Assess Your Spending Habits: Analyze typical spendingpatterns to match with card rewards.

(2) Consider AnnualFees:Evaluate whether benefits justifythe cost of annual fees. Ifholding multiplecredit card, anyincrease in annual fee will make dent to your financialstability.

(3) Interest Rates: Understand and compare interest rates,especially if carrying a balance.

(4) IntroductoryOffers: Lookfor 0% APR or bonus rewards butbe aware of terms post-introductory period.

(5) Rewards and Benefits: Compare cashback, travel rewards,and additional perks offered.

(6) Foreign Transaction Fees: Choose cards without or less foreigntransaction fees for international travel.

(7) Credit Card Network: Ensure wide acceptance, consideringmajor networks like Visa, Mastercard, etc.

(8) Issuing bank and its Customer Service and Accessibility:Check reviews for customer service quality and assess online/mobileaccessibility.

Taking these factors into account will help you find acredit card that aligns with your financial habits and goals. Letme tell you it'soften askedwhetherit is good or bad to hold credit card. It'show you use it to cater needs andrequirements', momentyou adopt first level of thinking, surelyyou would be calling for tension and problems, asyou would be spending on non-essential.

How Banks makesProfit from Credit Cards:

Banks derive revenue from credit cards through variousavenues.