Thursday, February 10, 2011

Reality Bites : Credit Cards

In today’s fast moving world Credit Card is one of most sought thing in ones life. It is a gift of the modern age. It is also known as plastic money. It adds buying power, convenience, security and helps in building credit worthiness for a consumer. According to a survey customers who uses a card may spend up to 2.5 times more than a customers who use cash which can eventually translate into a 40% sales increase for business that accepts credit card. 

It also gives access to credit in times of emergency. Beside access to credit it allows a smart of transaction, hassle free shopping which not only saves valuable time but also provides security against theft. A consumer can always a use a credit card for every small transaction instead of writing a check or even going to the branch to withdraw money. 

In addition to this many cards offers buyer protection in case of defective merchandise or fraud. There are also special protection plan available which allows identity theft protection to a card user. Finally a credit card user can build his credit score or credit worthiness by paying up credit card bills in time. This eventually helps in long term access to Personal Loans, Auto Loans and Home Loans. Banks and Financial Instructions at times refer back to prompt of credit card payment as one of the criteria while they process a loan.

But the reality is quite different at times. With use of credit cards there is always a temptation of overspending and live beyond one’s means. Not being able to pay back on time results in paying up very high rates of interest and damaging one’s credit worthiness which makes to difficult to obtain any further loans. It becomes high alerting situation when a card user falls into the trap of revolving credit. This not only washes away his capital but also makes him/her as defaulter. For example, a developing economy like India credit card as a inflow of credit to the consumer resulting in higher spending and then to higher rate of inflation exactly what we had learn in economics. 

Moreover at times the credit card companies have been accused of targeting a younger audience which includes college students, young professionals who are less experience at managing their own finances. Beside these there are loopholes in the credit card contracts that allows the issuers to charge a high rate of interest than normal in case of payment default. Another grey area in this regard is the trailing interest issue. 

Trailing interest is the practice of charging interest on the entire bill no matter what percentage of it is paid. Card issuing company also are accused at times of charging different rates to different person.
So overall we could see credit card is one of most sought after thing in modern era especially for person from cosmopolitan background. However we should not forget our roots. It is always advisable to consider credit card as secondary (emergency) option rather than primary.

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