Are credit cards all that bad?

Let me clarify at the beginning of this post that I am not some telemarketer or a bank employee who is trying to sell you credit cards. J

While the use of plastic money has gained popularity in India, there is a general perception that they are bad and should be avoided. Credit cards could pose a threat to your long term financial security if used irresponsibly. And, if used prudently, you could reap a lot of benefits without piling up unnecessary debt. These perks are:

1.Free money: You can enjoy the float without having  to pay interest until the due date of the payment cycle.

2.Security: Your cash is lost forever in case of theft but not your credit card. You can immediately contact your credit card issuer who will cancel it and issue a new one.

3.Emergency: In case you do not have enough liquidity in emergency situations like car breaking down or some medical crisis, a credit card will be helpful.

4.International Travel: If you travel often across the globe, it is much more convenient and safe to use a credit card.

5.Loss protection: In certain cases, you have the right to withhold payment for unsatisfactory goods or services.

6.Incentives: A reward program entails accumulating points based on the purchases you make on your card. These points can be eventually redeemed for a wide array of options including travel, dining, electronic items, fashion, air miles, shopping vouchers, etc. There are also cash reward points in certain cards which can be redeemed for cash. Certain cards provide a complete waiver on fuel surcharge at select petrol pumps.

7.Insurance: A comprehensive air accident insurance cover is provided in many cards.

However, a word of caution comes with all the goodies in using a credit card. Do not just pay the minimum amount and roll over the outstanding balance. Pay the full loan amount or else you will end up paying a hefty interest on it (ranging from 24 to 40 per cent per annum).  Also, the additional purchases you make in the subsequent months will not enjoy a grace period and they will be charged interest from the date of purchase. 

Best still would be to avoid a situation where you are unable to pay the full amount when you buy something on credit. For this, make sure you budget your finances accordingly and are able to pay the amount by the end of the grace period.

To summarise, do not use credit cards to spend money you do not have or cannot afford. Otherwise, it will limit your future buying power and ruin plans of financial freedom.