The Credit card is the most popular credit instrument for all good reasons. But as the saying goes that everything has a darker side as well, stands true to this otherwise fantastic product also. On one hand while the credit card gives you the flexibility to buy now pay later on the other hand it also provides you extended flexibility not to repay complete amount in one go. The card holder can opt for paying as little as 5% of the total outstanding. As per industry specialists over 50% of card holders revolve the credit. However, another established fact is that this very flexibility also comes with risks. Read on to know more about the perils that you can be exposed to in case you wish to partially.
The debt on card grows very fast
Many people treat the outstanding as a loan since they are paying the minimum amount due in time. But the fact is that the loan outstanding continues to decline as one would continue to pay the EMIs. The scenario completely gets reversed on the credit cards since one can continue to use the card up till the prescribed limit even if the earlier amount has not been paid. This more less than often makes one’s debt continue to grow despite paying up some amount of the outstanding. One may not even realize when the debt on card has grown closer to the total limit available to him.
The cost of revolving is very high
In case the card holder decides to pay up only part, he should be prepared to pay as high as 50% of effective interest rate. The rate of interest communicated by the credit card companies though is 36% on annualized basis, the fact is that if one was to calculate the effective rate it will turn out to be far expensive. If one decides to pay only 5% of the due amount then most of it will go towards the accrued interest. And just in case the payment gets delayed by even a day, the late fee and interest alone may consume complete 5%. If one was to calculate it will roughly take 10 years to pay off an outstanding of 1 lakh if only minimum amount of 5% was to be paid every month.
You lose on the interest free credit
The interest free credit period is an exciting proposition on plastics. However, most of the card holders are unaware that this is only available only if complete outstanding is getting paid every month. In case of partial payment being made, any purchase will attract interest right from day one. Since the interest continues to be high even on fresh purchases, each swipe will cost much more than the original cost.
Can damage the credit score
Credit cards undoubtedly are the biggest cause of defaults. Given the flexibility, not only in times when one has financial stress but otherwise even on a regular basis some people continue to use and max out on the limits. This leads to a highly precarious situation and with a slight stress on finances, the repayment becomes an issue. The delayed payment and default on the cards are far easier than the other loan products. Continued default can lead to one’s name reflecting in loan defaulter list.
Can be a hindrance in building the contingency fund/ wealth
A contingency fund is of high importance. However, high card usage and flexible payment pattern may lead to a situation where the holder is only engaged in managing the funds to meet the personal and debt related obligations. In such a situation creating a contingency fund or saving money for various long term objectives will get impacted.
Word of advice
While cards are a great product but prudent use will be the key to their management. Only the amount that can be repaid in one go must be used on the card. Only in case of some extreme requirement should the outstanding be paid in part.
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