This article was published in The Hindu Business Line on 17 Aug 2015
Today, every other person with a decent income has a credit card in the pocket. Twenty years ago, this was a novelty! Of course, credit cards offer convenience over cash but there is also an alarming danger of paying high interest and fees, if the user is careless.
The benefits of using credit cards are convenience and credit limit.
The term ‘credit’ means that you are taking a temporary loan from the issuing bank while shopping with the card. There is a limit given for this ‘credit’. Bills are raised monthly. If the bill is paid before the due date, there is no charge to the card user. But if the bill is settled after the due date, credit card companies will charge annual interest of 20-30 per cent on total amount outstanding. This is how the companies make money. There are more options now available to convert a large bill outstanding into short-term (six-12 month) EMIs.
Convenience is the amazing benefit offered by credit cards. As a replacement for cash, it is a convenient way to shop and transact.
The bad side of credit cards is its misuse. People tend to splurge on their credit limit simply because it is there! Then they can’t pay the bills from their monthly salaries. So they start revolving on the card and end up paying huge interest. Sometimes, we have seen people paying twice the price of goods they purchased (after adding interest cost). In some rare cases, people even have six or seven cards and they are constantly shuffling their credit between these cards! These are not financially healthy practices.
So, is there an alternative to credit cards that provides the same convenience? All major banks provide ATM-cum-debit-cards to their saving bank customers. Debit cards merely use the cash in your account; the amount is simply debited from your savings bank account and the bill is settled immediately with the shopkeeper.
Benefits of debit cards
Debit cards offer three benefits. First, they are as convenient as credit cards and save you the hassle of having to carry physical cash. Second, you don’t have to worry about interest payments — banks don’t charge interest on debit card usage. Third, debit cards help inculcate financial discipline as you cannot spend beyond what is available in your bank account.