Recently I made a post on the Advantages of using a Credit Card. So it makes sense to address the disadvantages too. Although there are fewer disadvantages than advantages, its impact is far more devastating.
Let’s address them too!
Falling into the Debt Trap:
To understand this better, read my previous post on ‘Why does a Bank Offer Credit Cards?’ where I explained the bank’s benefits in a credit card system:
- To make you shop more than you can repay back, and charge interest on that.
- To earn if you do late payments or partial payments by charging fines and interest.
- To filter out high creditworthy individuals (who don’t fall into 1 or 2) and offer them higher credit lines (like loans) where they can earn interest.
- To earn from merchants against transactions where the credit card is swiped.
You see, despite giving so many reward points, cash back, complimentary benefits, and direct discounts, banks are able to successfully run the credit card system for years. This is direct proof of the fact that banks and financial institutions are able to churn out money by charging interests and other fees.
That means indeed people fall into the Debt Trap and spend more than they can afford! In the long run, they will become extravagant in spending matters and it will be worse.
Ruining Credit Scores:
If you fall into the Debt Trap and keep on defaulting payments or missing due dates, your CIBIL Score will be affected. Eventually, you may not be able to get loans at all since your bad credit behavior will be reported.
Remember, it takes years to strengthen your Credit Profile, but just months to ruin it completely.
Ohh, I have to Spend!
Credit Cards are always designed to make you spend even when you don’t always intend to. There may be monthly spending milestones offered to you by your bank, annual spending criteria for a renewal fee waiver or spending like ₹2000 on a store to apply a 10% off card offer.
These are all neatly laid out to push you out of your normal ‘expenditure’ zone. Remember, even if you do 10% extra spends, that’s a plus for the bank.
The More Cards, the More Headache:
If you have multiple Credit Cards, chances are that you have to keep a tab over your billing dates, due dates, card spending milestones, spends for the annual fee waiver, and so on! Sooner or later, it will become a headache for you if you don’t find a way to manage it efficiently.
Luckily, Cred App does a good job of automatically detecting your credit card statements, finding hidden fees, and notifying you about due dates over Whatsapp. You can also use our FinTalks Credit Card Planner.
Refund to Credit Cards:
Credit Card refunds come back to the card directly without affecting your bank account. This is a good thing, unless and until you get your bill generated for that month before the refund is credited to your card.
In most cases, you have to pay the total amount generated on your Credit Card Bill. Refunds to Credit Card are NOT considered payments in general. They will be adjusted in your next statement. However, some banks will consider it as payment if you send them an email and request them to consider it as payment.
But depending on the situation, and your purchase date, return/cancel date, and refund processing, there is always a sense of insecurity about bill generations before refund credit.
Using your Credit Cards for Others:
Credit Cards are unsecured credit offered for your personal spends. This can obviously include spends for your dependent family members, and also direct family in general (even if they are not dependent fully on you). These fall under ‘personal expenses’.
However, since credit cards offer decent reward points or cashback for transactions, many people end up using credit cards for friends, relatives, and even unknown people. This is not an authorized use case of a personal credit card.
While you may not fall in trouble for occasional purchases for your friends and relatives (since it falls under gift spends which is allowed), continuously using your credit cards for high-value transactions every month beyond your regular spend pattern will lead to permanent cancelation of card.
Choose between Good and the Evil:
You see, there are people who use Credit Cards responsibly, and there are people who overspend. For the first category of people, credit cards will always be rewarding, forever. For the second category of people, they are the ones who end up paying fees for the rewards enjoyed by the first category.
My point here is, for the ‘Credit Card system’ to run in motion, both these categories of people are required by the bank. But it is up to you which path you wanna take. If you choose to look at the brighter side, you may enjoy huge benefits from Credit Cards.
These are all the disadvantages coming into my mind right now. If you have some more points to share, don’t forget to comment below.
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