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The Good, Bad and Ugly of Credit Cards That You Need to Know

Credit cards give you expanded buying power, they make you feel empowered but are they really good for you? An expert lays down the pros and cons 

In Confessions of a Shopaholic, Rebecca Bloomwood (Isla Fisher), who is desperately trying to overcome her obsessively impulsive shopping habit, tries to freeze her credit card in a blob of ice with the hope that it would solve her problems. A credit card gives you spending powers and seems like an alluring option to carry with you. Hena Mehta, Co-founder and CEO of Basis, India’s financial services destination for women, powered by education and communities, enumerates that a credit card also helps you build your credit history, which makes you more attractive to lenders. But there’s a catch these pieces of plastic or metal can make you overspend. “This incredibly powerful tool can also be a slippery slope if not used responsibly,” she cautions. So she breaks down everything that you need to know about credit cards into relevant points.

credit card

The Good:

Free loan!
Yes, a credit card offers you a free credit period for the monthly cycle. Whatever you spend on your credit card during your monthly cycle, is covered by the bank/credit card company. You need to pay it back only at the end of that cycle, and so you’re effectively getting a free, (super short term) loan!

Many cards offer highly lucrative reward programs that can actually save you money, even after factoring in the annual fee they may come with. You just need to be on top of the rewards, and remember to redeem them! Rewards could be in the form of cash backs, offers, discounts and other perks.

Tracking expenses
Not one of those people who likes to write out expenses on a daily basis? Credit cards can be a great way to track your expenses, without having to do much work. You can also use it to understand your spending trends.

Building credit history
Things like a home or car loan may be on your financial roadmap. Most lenders look at your credit score to understand your creditworthiness as a borrower when you apply for loans. Higher scores get you better rates and terms. One of the ways to getting to a great score? "Responsible use of your credit cards - including paying off credit card bills on time and not spending more than a certain percentage of your monthly limits (typically 30% is the recommended credit utilisation ratio in order to maintain a healthy score. So if you have a 1 lakh limit, don’t spend over 30,000 on your credit card per cycle)," advises Hena.

Dispute and fraud protection 
Many credit cards offer protection against fraudulent merchants, which debit cards and other methods of payments don’t. This could come in handy in many situations!

The Bad:

Ridiculous interest charges and fees
Credit card debt is one of the most expensive loans you can take on. Average interest annual rates are whopping 35-42%! You want to aim to never get into this territory. While it may seem like paying back the minimum amount every month is enough, you are actually accruing interest on the balance amount - and the interest on this can spiral up to ridiculous, highly stressful amounts. To top that off, there could also be late payment fees if you don’t pay the minimum amount due. The bottom line: pay back your credit bills in full, on time, every time. Set multiple reminders if you have to!" says Hena.

Cash Withdrawals
Unlike debit cards, credit cards charge high interest when you use them to withdraw cash - since you are effectively borrowing that money, not taking it out of your own bank account. While this could be ok in rare emergencies, try to avoid this option.

Credit cards may give you the illusion of spending power that you don’t have. Create budgets, and set your own limits for spending every month, even if your credit card offers higher limits. You don’t want to go over your means and spend on things you wouldn’t otherwise be able to afford!