What are the pros and cons of credit cards
A credit card is one of the most popular and sought-after bank products. They have higher interest rates than consumer loans and, therefore, the bank gets more money from each customer. But access to borrowed money alone is no longer as appealing, so banks have to compete with each other and come up with new benefits for credit card holders.
The benefits of credit cards
A credit card gives you access to borrowed money. This is its main purpose. In most cases, the card works as a revolving line of credit. That is, the user pays off the card with borrowed money, pays off the debt, and can borrow from the bank again.
The main advantages of credit cards are:
- The ability to use the bank’s borrowed money within an approved credit limit;
- Access to a grace period, which is not available when applying for a consumer loan.
Before choosing a credit card, compare the offers of several banks on the parameters that are most important to you. This can be:
- amount of credit limit;
- the cost of issue and servicing;
- the presence of a grace period when the bank does not charge for the use of borrowed money;
- term of the grace period;
- size of the minimum payment during the grace period;
- interest rate outside the grace period;
- availability of cashback;
- loyalty programs, in which the client receives bonuses, miles, or discounts when purchasing goods and services from partners of the bank.
The final set of criteria for each borrower will be different. When selecting a credit card, first look at the offers of the bank where you already receive your salary. Or apply to a bank that you’ve worked with before, either by making a deposit, taking out a loan, or using other services.
1. Credit limit
A credit limit is the amount of money you can borrow to pay for things, services, or cash you can withdraw. Some banks may have a limit on the amount you can withdraw in cash or may not allow it at all, but that’s rare. Banks charge the highest interest rate for withdrawing cash from credit cards, so it is usually unprofitable to use the card for this purpose.
The maximum limit of the bank approved only for premium customers and reliable borrowers with high incomes. But even such borrowers may be approved for the minimum loan amount when they first apply.
The credit limit is increased if the borrower does not default and spends the entire available amount of the loan. Some banks increase the limit automatically, while others consider this issue only at the request of the client.
Pay attention to your bank’s terms and conditions. Sometimes customers encounter situations where $200 is initially available, but then the limit is increased to, for example, $400. The borrower spends all the money from the credit card, in the end it turns out that the amount of debt is twice as much as it was under the original conditions. If you don’t want this to happen, keep track of the bank’s notifications about increasing your credit limit and refuse such offers in a timely manner.
2. Speed of access to borrowed money
Banks issue credit cards more readily than consumer loans, so the customer spends less time. Some banks approve credit cards on a remote application within minutes or hours. There are several banks in the Russian market that not only issue cards quickly, but also deliver them at home or to a specified address. You do not have to go to the office and stand in a queue.
You don’t have to go anywhere to get borrowed money from a credit card again. The credit limit is restored when the previous loan is repaid and, therefore, you can pay with the credit card again. This saves time and makes it easier to access credit.
It can take from a few hours to a few days for the bank to gather the consumer loan documents and review the application. This is why a credit card can be a good alternative. However, you will have to pay for the convenience – the interest rate on the card is higher than on a cash loan.
3. Grace period
A grace period, interest-free or grace period is the period when the credit card holder can use the money for free. It is an indisputable advantage of credit cards as compared to consumer credit, where interest is charged from the first day until the date of final repayment.
4. The possibility of interest-free withdrawal of credit funds
Most credit cards have a grace period that doesn’t apply to cash withdrawals. But such offers are increasingly common in the market. In most cases, the card limits the amount you can withdraw.
Some banks have the same terms for cashless transfers to cards of other banks. In others, this operation is equated to non-cash payments.
5. Other benefits of credit cards
The choice of the right credit card is influenced by the availability of other benefits and privileges. These may include:
- cashback on all purchases and increased cashback for payments in certain categories or from bank partners;
- bonuses that can be exchanged for money or used for future spending;
- discounts from the bank’s partners;
- accrual of miles that can be spent on the purchase of air or train tickets, as well as on hotel reservations;
- interest on the account balance.
The last option is found on combined cards, which are both credit and debit. In this case you can keep your money on the card, and the bank will charge you interest. With such cards you can use your own money and the bank’s borrowed money at the same time.
Credit cards have other advantages that everyone has long been accustomed to:
- high speed of payment;
- you can make a purchase at any time, even if you do not have your own money;
- there is no need to carry cash;
- it is more difficult to steal money from a card than cash;
- the opportunity to pay for goods on the Internet;
All these advantages can simultaneously become disadvantages, if you do not know how to manage money competently or do not know how to secure money and personal data.
Disadvantages of Credit Cards
Credit cards have several disadvantages:
- You need proof of income and ability to pay to be approved for a large credit limit;
- the interest rate is higher than a cash advance consumer loan;
- high interest rates and penalties for violating the rules of use and repayment deadlines.
In addition, the bank may charge fees for issuance and annual maintenance.
1. Interest Rate
A significant disadvantage of all credit cards – a high interest rate if you compare it to the interest on consumer or purpose loans. The difference can be as much as 10-15%, which is too much not to consider when applying.
Many banks don’t write specific rates, but rather indicate a range of 5-10% per annum. Or in the advertising voiced only the percentage for the most “high-quality” borrowers. Not all customers will be able to qualify for such conditions.
If a potential borrower does not receive a salary in the bank, can not officially verify income, or he has ever had violations in credit history, he will approve the highest rate. And that’s not all the reasons for a higher rate. Banks do not publish criteria for evaluating clients, so it is very difficult to guess in advance what conditions you will be able to qualify for. There are situations where the same borrower two banks offer rates with a difference of 5-7%. This is a significant gap, so always look at the personal conditions that the bank offers you, rather than stating in the advertising.
2. Issuance and annual maintenance fees
When general terms and conditions are equal, credit cards with free issuance and maintenance fees are most advantageous for the user. But not all banks offer such credit cards. But the fact that there is a fee should not become an obstacle.
Compare credit card terms and conditions in the aggregate. Look at all the benefits and charges at the same time. Study additional conditions. It happens that the bank charges no service fee if you spend $100 a month on the card. Or they charge extra cashback to help you pay the cost of issuance and maintenance.
Finding a completely free credit card isn’t easy. Banks are in no hurry to part with their sources of income. But it is possible to find such cards.
Look carefully for the full terms and conditions for issuing, reissuing, and servicing cards. Sometimes the bank gives the first credit card for free, but has to pay for the second one. Or the first year is free of charge, but beginning from the second year the bank charges high fees.
Pay attention to the full rates and possible charges for other services:
- sms alerts;
- access to a personal account or mobile application;
- top up fees.
Very often you can recharge your credit card for free only at the cashiers or ATMs of the bank that issued the card. This can be inconvenient or expensive if neither is available nearby.
3. Cash withdrawal and penalties for late payment
Most banks charge a fee for cash withdrawals on credit cards. The cardholder will be charged interest and a fixed fee for each transaction. In addition, the bank charges a higher interest rate for cash withdrawals than for cashless payments. Keep this in mind if you want to withdraw borrowed money.
The bank charges a fee for failure to make the minimum payment within the grace period. If you do not pay your interest or the amount owed on time, you may be subject to penalties.
In order not to violate the grace period and to use the credit card with maximum benefit, study several parameters:
- What is the minimum payment in the interest-free period. This can be 5-10% of the amount owed, which you must repay if you don’t want to lose your grace period.
- When is the minimum payment due. Some banks have the period tied to the date of statement or card processing, while others have it tied to the date of receipt of the loan.
- Does the grace period apply to cash withdrawals.
Banks charge higher fees and penalties for violating the terms and conditions of the interest-free period. Be sure to review the rules of your credit card to get the most out of it.
In addition, if you fall behind on your credit card payments, the data goes to the Credit Bureau. This will have a negative impact on your credit rating. If you do not repay the debt, the bank will close the credit limit. In critical situations the banks will take you to court. Remember – a credit card is a handy tool if you understand exactly how to use it and how to get the most out of it. If not, it can be a source of financial difficulties and the accumulation of large debts.