Credit cards: pros and cons of having one

It may look fascinating to have credit cards, but there are many pros and cons in having one. Well! Since credit cards come with consequences, the option of having it may be a moot question before many while applying for and having one.

The saying goes, ‘what is in the name’? Credit card as the name suggests provides ‘credit’ or ‘credit facility’ to the extent of limit fixed by the card issuing financial institution/bank. Issuing FI/ bank will fix or approve the limit after due appraisal of one’s application for it. In essence, it is a pre-approved ‘credit limit/loan facility’ by the issuing FI/bank.

The card may be put to use to the extent of the limit approved for purchases by swiping at select outlets — now there are innumerable for purchases as well as to make payment for expenses incurred such as hotel bills/ lodge charges etc., by inputting PIN (personal identification number) provided by the FI/bank for transaction to be through.

The limit involved in a credit card is revolving in nature. Once the card dues are paid by the due date, the limit gets reinstated.

For example, if the limit approved by a FI/ bank is Rs 80,000 on a credit card and the entire amount of Rs 80,000 has been spent, presuming the billing cycle to start from first of the month, the statement date will be 30th of the month and the due date for payment of entire dues of billing cycle will be 20th of next month.  Once the entire dues there under are paid by the card holder, the limit gets restored.

The pros of having a credit card is that credit is available to the extent of pre-approved limit for a song and without interest for 50 days if the entire card dues are paid by the due date sans the annual fee ranging from Rs 500 to Rs 5,000 levied by the issuing FI/bank depending on type of card like Diamond, Gold or Silver.

FI/banks would approve additional limit in case of need to enable payment beyond the pre approved limit if the repayment history is robust is an added advantage. Card transactions are fully transparent for which the government is pushing for. Money spent on cards will earn reward points which may be redeemed for gifts.

The cons or flip side of having it is that since immediate pay-out is not there, there is temptation to spend which may prove quagmire as the interest charged is exorbitant and formidable in case of defaults. Hence, one has to be discreet in spending by resisting the urge.

Cash withdrawals are permitted on a credit card, normally to the extent of 40% of the credit limit and in the above case to the extent of Rs 32,000. Cash withdrawals come with a cost, rather high — FI/bank would charge 2.5% of cash withdrawn or minimum of Rs 300 as cash advance fee plus 2.5% to 3% per month (30-36% per annum) as finance charges from the date of withdrawal till the date of payment.

The card holder has the option to pay the entire dues in one go by the due date or 5% of the amount due with a minimum of Rs 200 whichever is higher. The balance entails interest at the rate of 2.5% to 3% per month. (30-36% per annum).

If there are delays /defaults in payment of card dues, late payment fee of Rs 200 to Rs 750 is charged besides the interest at the rate/s noted above.  Delays and defaults would also get reported to CIBIL which may sully the credit history.

While credit cards, of late, come with micro chips and are fully safe, card holder should not divulge details of the card such as its number, PIN number, address, mobile phone number etc., to anyone including the officials posing as that of issuing FIS’/banks’ as prank callers are on increase to defraud.

Blocking a card is as easy as sipping a glass of water. One may phone-up the toll free number to block and obtain a ticket number for future reference. One may get flabbergasted looking at the statistics available about credit cards. Total number of cards issued is nearly 26 million as on July 2016, year-on-year growth being 18%. Outstanding card dues there-under amounted to around Rs 43,000 crore, showing year-on-year growth of 30%. Defaults on cards are reported to be alarming and at 15-20%. This gigantic growth in card business would not have been possible without there being clamour to have the credit card/s/demand.

Dos and don’ts

Avoid cash withdrawals.
Endeavour to avoid carry forward of the dues.
Avoid delays and defaults.

It may look quite amusing to have a credit card and flaunt it, but beware it may prove catastrophic as the charges/ interest rates are quite high in case of defaults and many are in deep troubles.

(The writer is a former banker)