Financial experts suggest that before taking a credit card, people should ask themselves and analyse whether they actually need one or not.
Also, these days, there are many e-wallets available. Money transfer through digital platforms is easy. There are many attractive cashback offers available on these platforms. So is it really worth it to have a credit card in today's time?
"A credit card provides you with an option for a short-term credit that can be used in case of emergencies. Also, if credit card balances are paid within the grace period, it helps in building one's credit score, thus leading to future possibilities of getting loans on favorable terms," said Rahul Agarwal, Director Wealth Discovery/EZ Wealth.
Below is a payment schedule for a typical credit card loan:
Suppose you need cash urgently and have withdrawn cash of Rs. 40,000 through your card and plan on paying within 12 months.
Interest Rate per annum: 36%
Interest Rate per month: 3%
Equated Monthly Installments (EMI): Rs 4,019
Processing Fee: Rs 400
Processing Fee + GST: Rs 472
Your loanrepayment Schedule will be as below:
|Month||Starting Principal Balance||Principal Amount||Interest Amount||EMI||GST||EMI + GST||Ending Principal Balance|
In summary, for a Rs 40,000 loan on a credit card with a payback period of 12 months, you will end up paying a total of Rs 49,000 which includes Rs 9,000 in interest and fees, said Mr Agarwal. "High interest payments prevent repayment of the principal. In other words, the borrower falls in a vicious cycle of re-borrowing, or rolling over money from another source because they are unable to afford the scheduled payments on the principal of a loan."
Credit cards offer the benefit of cash advances, balance transfer facilities, reward points and also increase your purchasing power with the help of monthly installments. However, they should only be used for emergencies and users should not take more cards than needed, experts say.