In October 2023, credit card spending reached an all-time high of Rs 1.72 lakh crore. Indians have used credit cards to spend up to Rs 5 lakh crore in just the last three months alone, which is equivalent to roughly 2% of the country's GDP. Because they make it easier for people to spend money, credit cards have emerged as a crucial instrument for stimulating the economy and promoting corporate and economic growth. Credit cards have the potential to help businesses and individuals alike when utilised sensibly, which will boost the economy.
Credit cards come with a host of benefits, but it's important to use them sensibly to avoid potential financial pitfalls. For instance, if your credit card limit is Rs 50,000 and you spend Rs 40,000 in a month, your CIBIL score may decrease if you don't pay the full balance before the due date. This is because your credit utilisation ratio, which ideally should be around 30%, is now over 80% (you spent Rs 40,000 out of Rs 50,000). To improve your CIBIL score over time, you should aim to pay only Rs 15,000 a month.
You can use credit cards as effective financial tools to make purchases of products and services. Credit cards offer ease and flexibility for a variety of uses, including bill payment, trip booking, and shopping. You may make purchases without worry, pay back the money later, and even get reward points. Here's how to make good use of a credit card:
Credit cards improve daily living by providing a practical means of managing financial transactions. Users may conveniently pay their utility bills online using credit cards, as many of them provide auto-debit alternatives. Credit cards make it easier to plan vacation plans, make hotel reservations, and buy necessities for the trip. Regular travellers may take advantage of free access to airport lounges and reward points that can be converted into air miles. Credit cards allow for auto-debit for streaming subscriptions and are commonly accepted for online and in-store buying. Large-ticket purchases like electronics and furnishings may be bought using credit cards that allow convenient interest-free payments, and many restaurants also give incentives or discounts for dining out. Users of ride-hailing applications may link their credit cards to make payments automatically, doing away with cash.
Credit cards provide short-term borrowing choices for everyday needs and contribute to the development of your credit history. Efficient cost management of credit card usage requires understanding grace periods and interest rates.
Credit Cards vs. Debit Cards
A debit card takes money straight out of your bank account, but a credit card offers you a line of credit. Over the past ten years, the number of credit card users in India has increased due to the growth of digital transactions. Many customers were forced to rely on credit cards for everyday transactions due to demonetisation, which caused a shortage of currency. According to the Reserve Bank of India, 36.2 million credit cards were in use as of January 2018.
Cash vs. Card
Since cash is accepted almost everywhere, why choose a credit card? Although cash is physical and comes with no interest, credit cards provide special benefits, including the capacity to make large purchases, tracking transactions, and perks like cashback or discounts.
Pros of having a Credit Card
Credit cards come with many benefits that improve convenience and financial flexibility. First, they provide deferred payment, which lets you buy now and pay later. This makes obtaining credit easier without taking money out of your bank account. Thanks to the quick application procedure, getting a credit card is now easier than ever, and banks are happy to provide cards to customers. When using credit cards responsibly, you can establish a credit history that can help you get loans in the future. Credit card statements also provide a thorough history of usage, which improves security and helps with budgeting. Numerous credit cards provide benefits, including cashback, rewards, and discounts. For example, the Kotak Mahindra Bank PVR Gold Credit Card offers 24 complimentary movie tickets yearly.
The EMI option permits instalment payments for major items, such as electronics, and most credit cards include an interest-free term of 45 to 60 days if the entire balance is paid by the due date. Credit cards can be quite handy for paying for unforeseen costs like medical bills in an emergency. Services like CPP India and One Assist offer protective measures that help prevent card theft and provide assistance with replacements. Lastly, credit cards make it easier to purchase in other currencies, negating the need to bring and exchange cash while visiting other countries.
Cons of having a Credit Card
Although credit cards provide many advantages, there are also serious disadvantages that consumers should be aware of. High interest rates are a big worry since banks frequently charge 3% monthly interest on outstanding debt. This interest increases fast if you don't pay off the entire amount owed. Furthermore, because credit card users might not instantly see money leaving their accounts and find it easy to lose track of costs, credit cards might contribute to overspending. If a person is unable to make their monthly payments as a result of their expenditures, debt may ensue. Additionally, there are frequently hidden expenses connected to credit cards, such as taxes, membership fees, penalties, and late payment fees, which may add up quickly.
Ultimately, even though credit cards are meant to be convenient, they can also be used fraudulently. This puts cardholders at serious risk since thieves can use stolen card information to make unauthorised purchases.
In a nutshell, credit card expenditure has increased dramatically in India, reaching Rs 1.72 lakh crore in October 2023, demonstrating the importance of credit cards in driving consumer spending and economic growth. Credit cards, which provide ease and flexibility, have revolutionised financial behaviour, with about Rs 5 lakh crore being spent in only three months. To prevent problems like high-interest debt and overspending, prudent use is essential. Credit card users are better equipped to manage their finances and boost the economy when they are aware of the advantages and disadvantages of using credit cards. Encouraging financial literacy will be crucial in ensuring that the credit card business grows in a way that benefits both the country and its citizens in the long run.
Disclaimer: Kindly note that the views and opinions expressed are of the author(s), not Law Colloquy.
