Cards are useful, but beware of pitfalls

There are millions of people who spend recklessly with credit cards.  Credit card is a type of credit facility provided by banks and NBFCs for offline or online transactions. Credit limit is given based on factors like your income and credit score. Let’s find out how to use credit cards correctly so that you don’t get caught in the debt trap. Also, let’s find out how credit cards are being used in India.

Credit card spending jumped to Rs 1.4 lakh crore in May 2023. The number of credit cards increased to 8.74 crore, which was 8.65 crore in April.  According to figures of the Reserve Bank, spending through credit cards increased to Rs 14 lakh crore in the financial year 2022-23, which is 47% more than 9.71 lakh crore rupees in the financial year 2021-22.  Credit cards are being used the most in e-commerce business.

According to another data from RBI, as of April 2023, the outstanding balance on credit cards, i.e. the debt distributed by banks on credit cards, is 2 lakh crore rupees.  A year ago it was 1.54 lakh crore rupees.

Pros & cons
Amidst the increasing expenses by people with credit cards, let’s see what are  its pros and cons. The biggest advantage is that you get the freedom to make immediate payments from the credit limit. Although, you have to pay back the money after a few days.  It is also easy to take a loan with a credit card. Credit card has a monthly EMI facility so you don’t have to pay all the money at once.  Most credit cards come with various offers, cashback and rewards. You can use a credit card to earn reward points which can be used for cheap air tickets, train tickets, hotel bookings, grocery shopping, etc. You just have to choose a card according to your needs.  Every  credit card transaction is recorded in the statement. This can help you in making a monthly budget.  Paying the credit card bill on time improves your credit score.

Credit cards encourage excessive spending habits.  Keep in mind that money spent on card is actually debt. So be careful when swiping the card.  Because, spending too much on unnecessary things can trap you in debt.  The interest is very high if you don’t pay the bill on time. There are many hidden charges in credit cards such as annual renewal fees, processing fees and surcharges.

Now let’s talk about how to use credit cards correctly? Read the terms and conditions carefully before taking a credit card.  Avoid unnecessary expenses.  Your expenses should not be more than 30-40% of your credit limit.  Only spend with a credit card when you can afford to pay it back. Pay bills on time.  Find out the billing cycle of your credit card. If you shop after the bill is generated, you can get an interest-free period of up to 45 days. You can choose the EMI option for repayment if you make large transactions or use up your entire credit card limit.

Expensive cash
Avoid withdrawing cash from your credit card because both interest and fees are charged on it. Cash advance fee plus GST of up to 750 rupees is levied for withdrawing cash.  In addition, interest is charged at 4% from the day of withdrawal.  Choose auto-debit option if you have more than one credit card so that you don’t  miss out on making  payments.  Keep an eye on how you spend  with your credit card. You should set spending limits.  Many credit cards offer overseas transaction facilities but charges are also levied.  Make sure that you check out with your bank about various charges before using your credit card on foreign tours…

If you also use your credit card excessively, better become cautious. Putting a stop on unnecessary expenses with your credit card and paying bills on time will give you peace of mind.  There is also a risk of misuse of your credit card.  Be careful that your credit card details do not fall into wrong hands.  Inform your bank immediately if there are any unauthorised transactions.  You get insurance coverage for losses due to loss or misuse of your credit card.  Do not forget to avail of these services.