Credit Cards looks attractive because it comes with enormous freedom to spend. That too for a youngster who have lot of dreams, but limited money, Credit Cards looks like a perfect rescue partner. It gives new wings to explore the unexplored arenas. You can buy anything that was in your wish list for a long time and most importantly . . . pay later. Icing on the cake are the offers — cashback, reward points, discounts, annual fee waiver, converting into EMI etc.,
It has all ingredients to look and sound attractive to the beginners. But it is a double-edged sword. It comes will lot of pitfalls as well. Here are some of them:
The biggest pitfall of using a credit card is overspending. If you have cash of ₹1000, then you will buy things within ₹1000. Even if you like something in the shop and if it is above ₹1000, you will not or you cannot buy. So, your spending is limited to the money you have in hand. Whereas, when you enter the same shop with a credit card in hand, 95% of time you will end up the item that you like even if it is not affordable for you. Because of two reasons. One is that your credit card has a huge credit limit, and another reason is you are going to pay this only later, not immediately. So, you end up overspending — over than your capacity. This will lead you to debt trap.
2. Minimum Amount Due:
When the due date for the credit card arrives, that is when you meet the reality. The amount due is above your capacity due to overspending. Credit card offers you to pay only the minimum amount due. You can pay the remaining amount later. This gives a huge temporary relief to you. But, by choosing this route, you end up paying more than what you spent. Many a times 100 percent more. Minimum Amount Due is the MAD thing to do and that is why it was rightly named so.
3. Charges, Fees:
You end up paying more to the banks because of your newfound overspending habit and paying the minimum amount due. The banks charge penalties, interest on outstanding etc., which will be carried forward and you will end up paying interest on interest — The reverse effect of compounding interest. There are also other ways in which the credit card companies charge you. Annual fees, late payment fees, balance transfer fees, and the list goes on. The credit card is a product for the bank and rightfully they will try to earn money out of it.
How do you protect yourself from the pitfalls?
As I said earlier, credit card is a double-edged sword, and you must handle it with care. Here are some of the ways, that you can consider following to safeguard yourself from the credit card pitfalls.
1. Live within your means:
Understand the reality. Before heading to a shop, decide on the upper limit for your spending. The limit that you impose on yourself must be derived out of your income and repayment capacity. Most importantly, while shopping stick to the limit. When you see a product that is above your upper limit and you love to buy it, just remind yourself about the limit and also think what if you had cash only to that limit. If you cannot resist overspending, then do not carry your credit card from next time. Please note that this tip may not work for online shopping :)
2. Always pay in full:
As soon as you receive your credit card statement, pay the entire amount outstanding. Do not convert your high-value purchases into EMI. This practice will help you to avoid paying fees and charges to the bank. By doing this, you will ensure that you spend only up to the amount that you can afford to repay in the following month. This will also save your hard-earned money, which otherwise would have been spent in the name of charges and fees. Also, this habit will prevent you from getting into a debt trap and lead a Zero EMI life
3. Do not withdraw cash from credit cards:
Credit cards also gives you a cash limit which you can withdraw. The danger is that cash withdrawals attracts interest from the very first day. When you use your credit cards to purchase in online and offline shops, you will get some free credit period until your next due date. Whereas when you use your credit card to withdraw cash, then there is no free credit period. The interest rates are very high ranging from 36 percent to 48 percent. So, do not ever withdraw cash from your credit card.
Credit cards will certainly look attractive for everyone, especially for those who just began to earn. It gives a blind, notional, non-existing courage to spend. I would like to reiterate that credit card is a double-edged sword which need to be handled with care. If you mishandle, then you will fall into a debt trap in no time, which will eat up your hard-earned money. Also, you would have spent quite a number of years before you could come out of the credit card debts. Please stay away from credit cards if you cannot handle it appropriately. Making it a friend or foe is in your hands.