Credit cards can be a great budgeting tool, but like many financial products, they have their pros and cons. This guide describes the advantages and disadvantages of using a credit card. It allows you to make an informed decision about whether it is the right option for you.
What are the advantages of a credit card?
Credit cards can be a convenient and flexible way of credit that allows you to make purchases that you can pay for in the future.
Before you take out your credit card, it’s important to be aware of the potential costs and only borrow money you can pay back. To make the most of your credit card, it is important to keep your payment date and make a full monthly payment.
If you’re not sure if your credit card is right for you, we’ll give you some benefits you can count on.
For many people, the biggest benefit of a credit card is its convenience. Credit cards offer a number of advantages over cash:
Quick payment. It only takes a few seconds to swipe, tap or insert a credit card at checkout. It’s much faster than fumbling through bills and coins.
Easy access. When making purchases with a credit card, you don’t have to worry about how much cash is in your wallet. Especially useful in emergency situations, such as when you’re stranded at night in an unfamiliar city and don’t know where the nearest ATM is.
Fewer trips to the bank. Paying on credit means you don’t have to go to the bank often to find more cash. You also don’t need to carry around a big wad of cash, which can make you a target for thieves.
Currency conversion. Credit cards are the easiest way to make purchases while traveling abroad. They automatically convert items purchased in local currency to dollars in bills, often at a better exchange rate than you can get from a bank.
This is economical EMI.
Do you make bulk purchases with your credit card? Don’t worry about large refunds. You can convert your bill amount to a simple and affordable EMI and pay for it over a long period of time. This will avoid having to put a big hole in your pocket when paying bills with your credit card.
Cashback and rewards are required.
When you buy things with cash, that money disappears. But when you pay by credit card, you can often get some of it back through a credit card rewards program. The three main types of rewards programs are:
Cashback. The bank refunds a portion of the money you use as credit to pay checks or bills. Many cashback cards pay 1% on all your purchases, but some pay more for certain categories of purchases, such as gasoline or meals away from home.
Travel rewards. Some cards offer frequent flyer miles, which you can earn for free or discounted tickets. In some cases, miles can also be cashed in as gift cards, merchandise or cash travel rewards cards.
Points. The most demanding credit card programs offer “points” that allow you to cash in gift cards or merchandise. Because the cash value of the items you receive as points is not always stated, it is difficult to determine what value you are getting from the program.
Improve your credit score.
Using a credit card effectively shows that you can maintain a good financial standing. Thus, having a credit card helps people turn a low credit score into a high credit score. Credit cards are often used as “credit builders” as a way to improve your credit habits. If you use your credit card properly, you can gradually improve your credit rating and prove that you can borrow and manage your credit over a period of time.
Emergency cash cushion.
Credit cards provide an extra cash cushion that you can rely on in an emergency. If you run into an unexpected expense, such as medical bills or car repairs, you can attach it to your card and pay it off over time. And if you can’t put it on your card, you can get a cash advance.
Being able to buy now and pay off your credit card opponents later is not a feature, it’s a mistake. Because of the high interest rate on your credit card, paying for car repairs within six months will cost much more than paying upfront. It is far better to have emergency funds for this kind of expense than to rely on credit.
All of this is true, but there is no reason not to do both. You can use emergency funds for most unplanned expenses while keeping your credit card as a safe deposit box. If you need extra cash in a hurry, your card provides a quick and easy way to get it.
One of the major advantages of credit cards is that, if used correctly, you can transfer funds from one account to another, even if you are not a savings card provider. This option allows you to lower the applicable interest rates. For example, if you have an outstanding account on one credit card and you don’t have enough money to pay your current bill, you can transfer your balance from one credit card to another and use the interest rate on the new card. In some cases, you may also be able to take advantage of the 0% introductory interest fee when you transfer your balance. However, in some cases, you may also be required to pay a balance transfer fee.
If someone steals your wallet full of cash, that money will simply disappear. In contrast, if someone steals your credit card and uses it to make a purchase, you won’t have to pay for it.
This protection also applies to debit cards, but there is one important difference. When you discover that your debit card is missing, the thief buys your credit card already from your bank account. You can report the theft, but you still have to wait to get your money back.
On the other hand, the thief’s purchase of your credit card is simply added to your account. You don’t have to pay for items you didn’t purchase because you can report the theft before you actually get your bill.
Even if you don’t report the theft right away, your credit card still limits your liability. The most you’ll have to pay for falsely charging your credit card is $50. If only your credit card number and not the card itself is stolen, you won’t have to pay a penny.
When you make purchases with your credit card, you can view your spending history. Your credit card bill lists all of your purchases, so you know exactly where your money is going. This information is useful for setting a budget or sticking to a budget that you already have.
In contrast, when you buy most things with cash, it’s easy to get lost. You may withdraw $60 on Monday, you may drop to $20 by Wednesday, and you don’t know for sure where the remaining $40 has gone.
Sure, you can keep track of your cash expenditures by keeping receipts or creating a shopping list, but don’t forget to do it. Your credit card will be recorded automatically. You can also connect your credit card account information to the Budget app to get an overview of your spending with minimal effort.
Easy credit approval.
Credit cards also allow you to get loans from banks. When you do, your bank will transfer money to your bank account over and above your available credit limit. Once your loan is approved, the applied loan amount will be transferred to your bank account in a few minutes. It should also be noted that having a healthy credit/loan history can effectively affect your credit rating.