Financial independence is a great thing to have; especially if you’re a young adult and have just started out. Isn’t it a proud feeling?

As they say, with great power, comes great responsibility. Financial independence means not being liable to anyone but yourself about your spending… which, many a time, gives rise to a tendency of spending frequently.

Ease of access to money, no accountability for the expenses, introduction of plastic money, coupled with complete digitization of the banking system feel great. But we also need to be quite thoughtful about it.

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Facilities like credit cards, easy loans and EMIs, and more have made purchases easier and quicker… but they do have their fair share of pros and cons.

This brings us to the question –

Are credit cards beneficial for good financial health?

Well, the answer lies in your consumption pattern.

While they were introduced in India with the best interests of easy banking, back in the ‘80s, the banking landscape has gone through and continues to witness a significant change.

Between February 2020 and February 2022, the credit cards issued have gone up by 26%. This is in light of a considerably conservative approach towards them. This only goes on to say that there’s a shift in mindsets, in patterns. People are looking at it as a helpful tool to manage their purchases without worrying about their incomes.

While it is indeed a great way, it is also important to draw a line on the usage of this plastic money. If not used carefully, this may as well turn into a bane soon enough.

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How do credit card payments work and why should we be careful?

Making payments by a credit card means quick access to money. You spend first and pay later. It doesn’t even need an account in the bank. You pay your dues when the bill is issued at the end of your cycle. This is what you call deferred payment. This must be managed well because it doesn’t take long to become a deadly habit.

The e-commerce boom over the past few years, retail therapies, and the pandemic have all contributed to a large population bending towards credit card payments. With the convenience it offers, it also creates a delusion of having enough money while it is, in fact, accumulating future trouble if not used properly.

The consequences? It will leave you with no savings at the end of the month since most of your income would go into paying bills.

Using a credit card is easy, which is why overusing it wouldn’t take time. It is tempting to spend smaller amounts occasionally, which when added up, may become unmanageable.

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So, what exactly are its benefits?

1. Having a credit card helps create a credit history, which draws a picture of your creditworthiness for banks and other institutions. Our credit card payments cycle determines our credit score.
2. With deferred payments and easy EMI options, credit cards give us a chance to spend on larger purchases without burning a hole in our pockets and distributing the payment over a few months.
3. Credit cards bring with them many (and we cannot emphasize enough on this) advantages with money-saving schemes like a cashback or a reward system. These can be redeemed with purchases or used towards dues.
4. When most of your expenses are on your credit card, you need not maintain a separate record of expenses since the bank sends a detailed list with monthly statements. This helps in keeping track of your expenses and budgeting.

Now, coming to how credit cards are bad for us and how we can work on it:

1. As mentioned earlier, the tendency to overspend and overuse a credit card can take over our conscience. To beat this, make sure you’re not spending more than 50-60% of your credit card limit. This helps you keep your expenses in check, leaving you with decent savings at hand.
2. Credit cards are also quite prone to fraud. Cyber and financial crimes can be curbed with awareness. Be alert while sharing confidential information and do it only on a secure platform, after substantial verification.
3. One major hazard of credit cards is a higher rate of interest and additional expenses. When the dues are not cleared in time, they accumulate interest at as high as 3% a month. So make sure you are clearing your credit card dues well in time.

The last word

Nothing is perfectly good or bad. Something that works for me, may not work for you. Each lifestyle has a different requirement, and everyone has their set ways to fulfill that.

If you’re wondering whether you should go ahead with a credit card, please do! By all means. Just don’t dive into it without a certain goal and a plan in place.

Wishing you happy banking!