Thanks to the Internet, you can get hopelessly in debt without ever leaving your house, courtesy your Credit card. A credit card has become an indispensable part of our lives, with its ease of use and convenient pay-back options. The discounts, offers and deals that a credit card offers are unmatched by any other financial product and spell a bonanza for the wise-user. Credit cards can be a convenient way to manage your finances but they can also be expensive and risky. They can become debt-traps if not used correctly or if you spend more than you can repay when the bill comes around. Your goal should be to pay off your credit card bills in full at the end of each month/cycle and set aside money towards your emergency savings/fund.
Credit cards are like sins, you enjoy now and pay later and the biggest con of a credit card is the minimum due amount that is displayed at the top of a bill statement. A number of credit card holders are deceived into thinking the minimum amount is the total due they are obliged to pay, when in fact it is the least amount that the bank expects you to pay to continue receiving credit facilities. This results in customers assuming their bill is low and spending even more, accruing interest on their outstanding, which could build up to a large and unmanageable sum over time.
“There are no free lunches” – a famous saying in the corporate world and the same is applicable to credit cards as well. Credit cards have a variety of charges/fees such as joining fee, late payment fee, annual fee, renewal and processing fees. Since your bank balance stays the same, it gets all the more tempting to put all your purchases on your card, making you unaware of how much you owe. This could lead to you overspending and owing more than you can pay back, beginning the cycle of debt and high interest rates on your future payments. Have you ever heard someone say that he’s become rich by using a credit card or from an airline mile, I am sure none has ever. Further more, missed credit card repayments and ongoing debts are recorded on your credit file and can impact your chances of getting a loan down the track. Further more, there are a range of fraud schemes that target credit cards. While you can be compensated for illegal transactions on your account, dealing with credit card fraud can still be a time-consuming and stressful experience. Keeping in mind all the above reasons, using credit card needs utmost caution and planning. But to be financially disciplined and stable, it is advisable to use debit card instead, for a simple reason that it takes funds directly from the money that you have in your bank account – acting much like a cheque, just faster. With a debit card, you don’t have to carry cash or cheques and it is very convenient to shop at a variety of places including filling stations, grocery stores, restaurants and retail outlets etc. They provide instant access to your money and are accepted worldwide.
Don’t go broke trying to look rich, act your wage and to bring stability in financials, one not only needs to make more money, but also needs to avoid losses. The payment fee, exorbitant charges for credit card, processing fee etc are nothing but unnecessary leakage of your hard earned money. Hence to avoid these, one should stop or lessen the use of credit cards. Transactions in cash/debit cards make you sense the cash spent and hence help in planning your finances accordingly. This would also reduce the tendency of impulsive shopping and unnecessary spending in daily life. In case you fail to use your credit cards judiciously, it would be like treating each day as your last and one day you will be right.
(Ifthikar Bashir is a freelance Financial Advisor)