Decoding the two aspects of credit cards: Balancing convenience and risks

Credit cards can be perceived as a lifesaving option in times of financial crunch, providing the convenience of easy access to funds anytime and anywhere. They can help build a credit history, reward use with cash back and points, and give a helping hand with the necessities of life. However, as much as these rectangular pieces of plastic can be a boon in lending financial help, they can also become a bane if not used judiciously, leading to numerous risks.

Mounting debt: It is okay to pay your credit card bill in full. However, if you don't, then you can be in trouble. The mounting debt is the most common and often devastating risk associated with credit cards. Credit cards grant access to a line of credit, and many users might tend to overspend without considering the consequences. The problem occurs when one fails to pay off the full outstanding balance by the due date, as the remaining balance incurs considerable interest rates. Over time, these charges can pile up, leading to ever-increasing credit card debt, and a vicious cycle becomes difficult to escape.

Adhil Shetty, CEO of BankBazaar.com, said, "Credit cards are a form of revolving credit, and it is strongly recommended that you pay off your credit card dues in full each month. If you fail to do so, you will be charged a high-interest rate on the remaining balance, ranging from 24 to 36 per cent per annum. Failure to make timely payments can lead you into a cycle of debt, which can become difficult to manage, especially if you are undergoing a cash crunch."

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Fraud or identity theft: It is easy to carry credit cards, swipe them, and use them conveniently across the globe. In fact, credit card usage has surged to up to 3 times over the past decade. Another significant risk linked to credit cards is the possibility of fraud or identity theft. In an era where digital transactions are so prevalent, cybercriminals have numerous methods to steal card information. If this information falls into the wrong hands, unauthorised purchases can be made, or, even worse, the cardholder's identity can be assumed for opening new lines of credit.

Shetty said, "Credit card users must be wary of cyber-attacks, which can be carried out in various unsuspecting ways. Credit card details such as the card number, expiry date, and CVV are prone to hacking, phishing and cloning. To mitigate this risk, it's important to keep your card details like the CVV and PIN secure and regularly monitor your statements to check and flag any unauthorised transactions."

If your credit card is lost or stolen, report it to your bank and get it blocked to minimise your liability in case it is used without your authorisation.

Credit score damage: A credit card helps build your credit score and accelerates your borrowing power. However, credit score damage is another long-term risk associated with credit cards. Missed payments, high balances, and too many credit inquiries can negatively impact one's credit score, making it difficult to secure loans or mortgages in the future. Additionally, regarding financial habits, over-reliance on credit cards can lead to poor money management and avoidance of budgeting.

Unaware of fees: Credit cards come with various fees you may need to be aware of, such as annual fees, late payment fees, over-limit fees, and foreign transaction fees. It is crucial that you go through the terms and conditions of your credit card agreement to understand these charges and know exactly what you will be expected to pay when using it.

Thus, one must educate oneself about the responsible use of credit cards to mitigate these risks.