Credit Cards serve a great value proposition for an average Indian consumer by increasing their daily purchase and spending power. Credit cards make it convenient for a borrower to obtain funds, either for any particular buy, supplementing income between their pay interval, or to start a business. Credit cards issued in India grew from 1.77 crores to 6.22 crores in 2021. However, credit cards are still considered taboo by most of the population of the country. In India, there are only 3 credit cards for every 100 people, showcasing a low penetration level of the credit card industry in the Indian market when compared to other countries. Therefore it becomes increasingly important to understand the pros and cons related to credit cards in India.
Pros and Cons of Credit Cards
Ease of use
A credit card is a more convenient and safer method of payment than cash. Credit cards can make payments for any purchase, whether online or at a merchant store. It eliminates the need to carry a large sum of money to make a purchase. Credit cards are also a safer and more secure option. Credit cards come with protection liability and extended warranties for their customers. Protection liability tends to safeguard the cardholder from any unauthorized or fraudulent charges reported on his account.
Builds Credit History
A person with no credit history may find it hard to avail of a loan. Banks provide credit facility to a borrower based upon their credit history. The credit history is a record of creditworthiness, dependent on the borrowing and repayment ability of the borrower. Banks keep a timeline of the credit activity of an individual borrower and report that to the credit reporting agencies in India, viz, CIBIL, CIRF Highmark, Equifax, and Experian. These agencies assign a credit score based on the credit history. A good score will help the borrower to get loans approved from banks quickly. It will also help in availing of credit at a considerably lower interest rate.
Rewards and Incentives
Several credit card companies offer various perks and benefits to their customers like cashback, shopping discounts, gift coupons, travel perks, and other rewards. These benefits and perks available to the cardholder are mostly redeemable over a year. These rewards and incentives provided are to offset the cost of owning a credit card.
Protection and Security
Credit cards are a more secure option when compared to debit cards. A debit card is directly linked to the cardholder the bank account that increases the chance of fraud. The cardholders’ personal information and bank details are always at risk whenever purchasing by swiping a card at the store. Unlike debit cards, credit cards are not tied to any bank account, thus making it difficult for hackers to access your personal information.
Cost of Borrowing
Credit cards have a high cost of borrowings associated with them in the form of interest. Banks tend to charge a higher rate of interest on credit cards than a traditional loan. It is because a credit card loan creates a revolving debt. A credit card loan does not feature a fixed repayment structure. Interest charged is based upon the credit balance of the borrower at the end of a billing cycle. Additional charges like service fees and late payment penalties on the unpaid balance get charged by the banks. These monthly charges can pile up quickly and can create a heavy debt for the borrower. It is because the banks do not require payment of the entire balance at once. They allow the borrower to pay off their balance in the form minimum amount balance.
Credit cards have eliminated the inconvenience of carrying cash in one’s pockets to buy things. It has led to the increased spending power of an individual. Due to this, people tend to spend more than they afford to pay back each month. In a purchase made with cash, the buyer knows about the cost of the item. The cost of a thing appears to be less significant with credit cards due to the period between when a thing gets bought and when the payment gets made. Therefore, it is better to stick to your budget plans and use the card responsibly.
Affects Credit Score
A borrower is liable to repay the due amount with interest to the bank. When the borrower over-utilizes the credit balance available against the credit limit. It may affect the credit scores negatively. Several factors like high credit utilization ratio and late payment of the amount would lead to low credit scores. A low credit score would affect the borrower’s financial health.
Credit Cards have their benefits and drawbacks like most things in life. Credit cards are financial tools that can help individuals develop a better standard of living and achieve their financial goals. Before applying for a credit card, collect all the necessary information about your credit card and make sure you understand the interest rate, fees, and when the introductory offers expire on your card.