Do you get a lot of calls from banks offering you credit cards? Or do you own one but don’t know how to make better use of it? Do you understand how a credit card works and how they make money?
We always suggest knowing these things before taking part in it, so let’s dive in to learn more about credit cards.
Estimated read time: 2 minutes and 51 seconds
Hint: Credit card is like yin and yang.
Buckle up, here we go!
What are credit cards?
Credit cards are a bank’s way to offer you a loan for your monthly purchases. In usual loans like home, education, and auto, it’s hard to make money for banks because they won’t be able to charge you beyond 15% per annum.
But through credit cards, they can charge you around 40% per annum because it is a personal and unsecured loan. There is no collateral provided to the bank. It is a high-risk, high-reward business for banks. And they will take this risk for higher returns.
But smart people don’t take debt unless they need it.
So banks started offering many benefits with credit cards like an interest-free credit period, reward points, discounts on curated brands, etc.
So, in simple terms, if you own a credit card, you can pay your food bills with credit. This won’t affect your savings account balance. It’s like you have borrowed money from the bank to pay.
The bank provides you with an interest-free period and reward points for the amount. That means you can pay back the bank next month without interest and also receive reward points which you can use later to buy some coupons or something else.
This made credit cards interesting for many people. Banks know that not everyone will pay on time every month. They are betting on this business for those few people who are likely to default at some point in the future. They can earn a lot from them.
If you own a credit card, which category do you fall under? Do you pay your due fully? Or do you default by paying minimum dues or nothing at all? Tweet at us.
How does a credit card affect your personal finance?
A credit card has both positive and negative sides. You need to be careful while using it because if you fall on the negative side; it overtakes all the positives. So let’s discuss the negatives first:
Negatives of credit card:
- If you cannot pay back the dues on time, you pay an enormous interest of 3 to 3.5% monthly interest rate. It’s an endless rabbit hole.
- If you don’t have control over expenses, a credit card will only increase your problems. Many people started spending a lot more than they need and fell into the credit trap.
Positives of credit card:
- You receive an interest-free credit period of around 30 to 45 days.
- A credit card helps you track and analyse your spending.
- You receive reward points and other rewards like discounts on curated brands, etc.
- If you use a credit card effectively, the most essential benefit it provides is a chance of improving your credit score.
What’s the credit/CIBIL score?
A credit score is a three-digit score that measures your trustworthiness to pay back loans. It ranges from 300 to 900. A rating agency evaluates your credit history and allots a score.
Lenders usually consider a score above 750 as good. Having a good credit score helps in getting quick approval for loans and better interest rates.
We often hear of credit cards leading their holders into debt traps. But, it is not credit card’s fault, but our financial indiscipline that leads us to incur steep penalties and finance charges, leading to debt traps.
If used well, credit cards can be tools to build your credit profile and save money. If you believe you are disciplined enough, then take advantage of the benefits provided by a credit card. Or else ignore it.
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