Like other tools, credit cards are only as good as those who use them. Credit cards can cause a huge amount of financial damage. Hence, it is important that you understand how to avoid this damage before you apply for them.
In February 2018, a total of 36.94 million credit cards were in operation, with the addition of 0.74 million cards, according to the Reserve Bank of India. Between February 2017 and February 2018, India added some 7.84 million credit cards.
Below are some of the reasons that can help you understand why one should say no to credit cards or keep their use to bare minimum:-
1] Interest Rates are very Expensive –
Credit card interest rates are high, which can make financing your purchases even more difficult. Interest is wonderful when you are the one saving, but it’s the worst when you are the one paying.
Self-control is important because those credit card interest rates are high. If you buy things that you can’t afford, you can end up drowning in debt real fast. If you don’t have the cash to pay for what you want, then you should definitely think twice before using your credit card to purchase that item.
Some credit cards come with acceptable introductory rates. But these can increase after a while and may turn unacceptable. If you can’t pay these rates, you should avoid them. And don’t think that you’re safe because you have a good job because things don’t always go as planned.
Interest rates of credit cards are also called as finance charges.
In India, current average credit card interest rates are 2.54% monthly and 30.26% annually.
2] Credit Purchases lead to Over Spending –
People tend to spend more money when paying with credit than they would with cash. Study shows that when you compare people shopping with cash and those shopping with a credit card, those with a credit card will spend more money. While this is good for the stores and for the credit card companies, it’s probably not good for your bank account.
They encourage you to spend more money than you have. The goal of the credit card company is to get you to spend more than you actually have. This forces you to borrow money from the company at a high interest rate. The company will encourage you to splurge on gifts, vacations and anything else they believe you will want. It will also give you a credit card limit that will help you to go into debt.
Total amount transacted through credit cards was Rs 37,660 crore in February 2018. It increased by 32% in the 12 month period ending February 2018. This shows how extensively people use credit cards.
3] Hidden Terms & Conditions may lead to Debt Trap –
If you actually read the terms and conditions when you sign up for a credit card, you’d be surprised at how many things you are not aware of about using a credit card. The small fine print will reveal that the company can increase at any point the interest rate, fees, penalties with a short notice of up to 2 weeks to the clients.
If a person actually reads the fine print when he/she signs up for a credit card, he/she would be surprised at how much the contract favors the credit company. You will also find that you give up your right to take the credit card company to court for any dispute you may have. There are a lot of other similar examples hidden in that fine print.
With hidden charges and prohibitive interest rates, credit cards often push many people deeper into debt. Getting out of this debt becomes difficult after a point. This is no longer a secret.
4] Damages your Credit Score –
Lower credit score determines a lot more than what interest rate you will be paying now. If you lower your credit rating because of unpaid credit card debt, then you can expect to pay more money in the future, when you opt for an important loan, like a home loan. Also, in some cases you won’t be able to get any loan also.
Your credit score drops when you don’t pay your credit card balances. It’s one of the worst things that can happen. Credit card companies, refinancing companies, insurance companies and even some employers look at your credit score to see what kind of a person you are (in financial aspect). A bad score will portray you as a high risk, an irresponsible person.
5] Emotional stress –
If you don’t owe anyone money, you won’t have to worry about delayed payment, penalties, fees, interest, credit score etc. This peace of mind is more important than the product itself.
Thus, remember that while credit cards may prove to be benefit in times of a financial emergency, they may also become liability if used recklessly. It, thus, makes sense to use your cards smartly and pay them off in full every month. However, if you are a compulsive shopper, don’t have control over your spending, and are unable to clear your dues on time, then credit cards are surely not for you.