In the era of developing technology and the desire to reach customer needs, banks offer us various types of products that are designed to simplify our lives and increase the chances of fulfilling our dreams of a new car, apartment or RTV equipment. For this reason, on the financial market we can observe a flood of newer and newer banking products.
One such tool is a credit card, which is currently extremely popular. In today’s article, we’ll look at a credit card, present the pros and cons of using it, and try to make a clear conclusion about whether this product is useful and worth your interest.
What is a credit card?
If you want to define a product like a credit card, the easiest way to do this is to list the differences between the debit card and the one mentioned above.
A debit card is usually issued additionally if you have a bank account to operate it and make various transactions, e.g. by paying for purchases in a hypermarket or withdrawals from ATMs. However, we must have our own funds on the account. In short, we have no money – we will not pay (although there are still debits, but this is a topic for a separate article).
It is different with a credit card. It is an independent and independent product. To have a credit card, you do not need to have a personal account in the bank. Moreover, de facto, we can manage funds that we do not have and which do not belong to us. Of course, at a later time you have to return the money to the financial institution that issued the card to us (about possible interest and costs later in the article). Usually, the client and the bank jointly set a limit on the amount that can be used in a given month. As with a debit card, both credit and cashless transactions can be carried out with the help of a credit card.
You can find more information on this subject in our article “What’s the difference between a credit card and a debit card?” .
Credit Card Advantages
Like any banking product, a credit card has its advantages and disadvantages. To begin with, let’s try to list those that favor the use of this product:
- We can use money that we do not have. We lack some amount of money to buy a new TV or other product, and we don’t want to wait until our pay for work arrives? Nothing lost. Thanks to the credit card, we can successfully purchase the selected item immediately, without waiting for another occasion. The amount of money we spend usually depends on the credit limit that we will set with the financial institution. What’s more, you don’t have to wait for money by submitting persistent applications. After the credit card is issued, the money is available immediately. In this case, you can see another advantage – comfort and convenience in use.
- Interest-free period . After meeting the appropriate conditions, it may turn out that this type of card is the cheapest loan currently available on the market, because in some situations the interest rate is 0%! We are talking here about the interest-free period. The interest-free period is the time during which the bank does not charge interest or any fees related to the use of the card. The period of such a period is set by the bank, but it usually ranges from 45 to 61 days. In practice, this means that if we use, for example, PLN 2,500 with the help of a credit card, and refund this amount during the interest-free period, then we will not incur any other costs, except for the amount spent. However, it is worth remembering that this situation only applies to non-cash transactions.
- Discounts and loyalty programs. Using a credit card at many points of sale can be the object of discounts and additional promotions. However, it is only profitable if we diligently observe the interest-free period. Many stores offer the possibility of collecting points when we use a credit card for purchases. The accumulated points can be later converted into money vouchers or in-kind prizes. If we don’t pay any credit card fees anyway, why not take advantage of the free gift option?
- Building a positive credit history. It is also a great opportunity to improve your credit score . As is well known, BIK records every financial operation that we carry out. Therefore, if the commitment is repaid on time, it will definitely have a positive impact on our credit history. We will not incur any costs and the creditworthiness will be much greater. You can read more about this in the article “What is creditworthiness?” .
Credit card disadvantages
As we can observe from the above examples, the advantages are enormous, but if we run out of financial control, then any disadvantages can prove drastic and lead us into trouble from which to get out it will be very difficult:
- Debt spiral. This is certainly the most serious disadvantage of using credit cards. In many cases, people experience a lack of control in connection with the use of this banking product. As long as we can use it, everything is fine. However, the problem arises when the repayment deadline expires and we do not have the amount we borrowed. Then interest and penalty fees are generated and the longer the repayment date is postponed, the greater the repayment obligation becomes. Therefore, if we are not sure if we will be able to return the amount in the given time, then we should think twice before using the wrong money.
- High interest rate. If we fall within the interest-free repayment period, we do not incur any costs. However, if delays are generated, then this type of card is also one of the most expensive loans on the market. The final interest rate depends on the particular bank that is the lender, but in some of them it can be as high as 12% per annum. This number clearly tells us how massive interest can be generated. If we could not return the basic capital in time, how will we deal with interest?
- Cash transactions. Cash transactions are a kind of trap for credit cards. This mainly applies to using it at ATMs to withdraw a certain amount of money. When we have the opportunity to withdraw cash on this account, and our budget is not very good at the moment, a credit card often seems to be a temporary recipe for us to solve financial problems. However, this is a kind of shot in the knee. Why? Banks want a commission for each card usage for a cash transaction (usually around 3-4% of the selected amount). As if that was not enough, then the interest-free period ceases to apply to us, and the high interest rate described in the previous section is calculated from the day the ATM is used.