Credit cards are one of the most popular ways to manage one’s finances. But having credit cards is not always prudent as they can turn out to be very tricky and costly. If someone is excited about all the perks and offers credit cards offer, he should also keep that in mind that failing to weigh the benefits accurately over the demerits can lead him to a distress situation.
Disadvantages of using credit cards
There are several downsides to carrying a credit card in the pocket. Some of them are so damaging that one may want to reconsider before getting a credit card. Let’s look into the major drawbacks of credit cards:
Behavior of Overspending
Though it is easy to spend with credit cards as well as pay off the debt, it can result in overspending by an enthusiastic cardholder. People often end up spending more than they actually can with their actual earnings. Meeting expenses with a credit card doesn’t imply that one need not pay the bills; instead it defers the payment for a while where one has already enjoyed some benefits at this expense. As such, spending with credit cards without considering the future ability to repay the dues can become burdensome for a person.
Some renowned institutions, such as the Massachusetts Institute of Technology, American Psychological Association, and Carnegie Mellon University, etc., have conducted studies on credit card spending. The results show that people are likely to be ready to pay a higher amount of money when they are doing it with their credit cards instead of taking care of it in cash.
High rate of interest and other charges
The biggest cost one has to pay for using a credit card is the interest charges. On top of that, credit cards have far more types of charges that will come along with a wide range of benefits they have to offer. Some might argue that interest charges won’t arise if the dues are paid within the due date. But there remain chances that the cardholder will get stuck in some financial trouble and fail to pay dues in time or in full. In that case, he will be responsible for service interest against the dues on the card. Moreover, when the cardholder avails any specialized service offered by credit cards, e.g., balance transfer, cash advance, card cheque, purchase on EMI, etc., he gets charged with related fees.
A survey resulted that the average interest rate on a credit card in the U.S. is around 15% per annum. However, it is also observed that it can rise to 22% – 23% per annum for users who have bad credits, which includes the penal interest.
Contemptible perks and benefits
Credit card companies always run campaigns offering many perks and benefits, which often lure the cardholders to avail them. Indeed, these offers may seem attractive for the time being but can have a more prolonged impact on a person’s capability to serve the debt. For example, a credit card may offer 0% charges for cash advance facility for a while. Still, it isn’t going to overlook the interest charge that would likely incur from the day of the cash withdrawal.
Frauds and identity theft
Recently, credit card frauds have touched the peak than ever. Fraudsters have become more dynamic and coming with newer ideas to scam credit cardholders. Fake calls, phishing, skimming, a trap of free wi-fi, duplicate websites, etc. are the most seen credit card frauds the world has experienced till now. Moreover, identity theft is another way for the scammers to misappropriate credit cards of others. These risks of fraud can diminish the attraction of credit cards despite having a lot of rewards and facilities.
Escalating hike in card debt: When the cardholder fails to pay his bill within the due time, he gets charged for late payment; moreover, interest adds up on the outstanding amount. Penal charges for the past-due period also may incur on his card. Whenever he uses his credit card in overseas, or transfer money to another card or account, or even take cash advance from the card, he is charged with related fees. These fees are likely to burden him with escalating card debt in no time.
Distressing credit report and credit score
As using credit cards with a good repayment behavior can add value to one’s credit report and increase his credit score, the opposite may also happen if someone is not making regular payments. When the cardholder fails to repay the dues on time, he causes a downgrade to his credit report. His credit score also decreases. And these go to further deterioration until the cardholder regulars his repayment.
Reduction in future or potential income
The time a person takes care of his necessities with a credit card, a portion of his future earnings gets reduced instantly. His obligation to pay the speeding from credit cards arises at that time. A portion of his potential income must be allocated towards repayment of credit card outstanding if he doesn’t want to worsen his credit.
Ways to deal with the disadvantages of credit cards
The shortcomings of credit cards are disruptive to a smooth life, and they can affect one’s financial and social life undesirably. But these can be tackled with prudence if a cardholder follows some advice.
Make timely payment
The best way to avoid any card of interest or piling up credit card debt is to make payments in time. The cardholder usually gets 15 days of grace period to pay off his dues. Paying the outstanding amount within this period will help him maintain good credit. He can also set an automatic debit instruction from his checking account in case there is a chance to miss the payment date unintentionally.
Pay credit card dues in full, not just the minimum due
Paying the minimum due amount is an excellent way to avoid being reported as a past-due borrower. But it won’t prevent the accumulation of interest. If the cardholder is only paying the minimum due amount for a while, he is likely to be stuck under huge card debt in a short time. To avoid this kind of distress situation, the outstanding amount should be paid in full.
Avail reward programs wisely
Before availing any reward, or periodical offer under a campaign, their long-run impacts should be understood in the first place. Taking on the perks must be avoided, which can cause higher pay-off in the future and hampers the regular cash flow of the borrower.
Get a card that matches the needs, not luxuries
Choosing the right card is both an essential and critical job. Sometimes people get credit cards beyond their needs, and those turn out to be taking care of their luxuries. To get the optimal benefits from credit cards, one should choose the right card, which is fit for his necessities, not the one which offers him a lot of bonuses.
Stay alert against card fraud
Since credit card fraud is uprising to a peak nowadays, there are no better alternatives to stay alert against the frauds and scams. The cardholder should avoid following any suspicious email or website, share card credentials, or hand over the card to someone else.
Though credit cards have numerous demerits, they can be beneficial to those who handle cards following the getaways to combat these disadvantages. If the cardholder utilizes his cards prudently and manages his finances with proper planning, he is scarcely to get under any credit card debt.