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The Credit Trap : Do You really Need a Credit Card?

Niranjan Bhombe

Pranav Mujumdar

9 March 2023

"Credit cards are one of the first recommendations you get as soon as you start working. You enter the corporate scene and...."

....see everyone around you using a credit card and the upfront benefits that it offers. However, you might want to think about the pros and cons before getting one of those cards for yourself. 


It might seem that the benefits outweigh the drawbacks of this easy credit. But you must know all the risks before taking credit for expenses. The ideal reason for undertaking debt would be to generate money. Using a credit card is essentially taking debt from the bank. This debt can become a burden very quickly if not paid back in time and in full. 



The Minimum Due Trap


The biggest trap for new credit card owners is the minimum due payment. The credit card provider allows you to pay the sum less than you owe and still continue using the services of the credit card. Paying only the minimum due would mean that you still owe to the bank on which heavy interest will be levied. The interest that banks charge can range from 2% to 4%, this means you are paying 24 to 48% annual interest on the loan if you default. 


Early users who do not know this technicality and mistake the minimum due for the actual borrowing amount end up paying high interest and it becomes difficult to pay back the credit taken. This can put the fear of borrowing in you which can restrain you from taking loans in future for some useful cause. 



Spending more than you earn


The habit of using a credit card for all expenses may make you believe that you can keep spending till the limit. Although you have excess to this cash, it is recommended that you spend only up to 40 to 50% of your credit limit to avoid spending more than you actually earn and can repay. 


The habit of spending the whole of your salary amount would amount to no savings and thus hurt your plan to become financially independent. You would then be living from check to check and in case of a financial emergency, you might spend up to the credit limit and then have no money to pay the bill. 


The Risk of Fraud


Though uncommon you can become a victim of financial fraud where someone that has your credentials and details on your credit card can spend money and if not proven a fraud, you would be liable to pay for the amount spent by the thief. If you inform the bank about any dubious transaction within the first 3 days then there is a chance that the bank will not make you pay for the fraud. 



The Mindset of Spending over Saving


It can be observed among us Bharatiyans that we tend to spend more when we transact electronically instead of in cash. You will think twice before buying that t-shirt you liked and don’t need right now if you pay in cash. The use of credit cards makes us more prone to spending on things we don’t need instead of saving for a rainy day. 


The access to easy credit may make it difficult for you to keep working on that financial plan of yours. Exercising restraint is necessary if you want to invest consistently. Avoiding unnecessary expenses in the early stages of your career would help you create a frugal mind-set which in turn will help you invest regularly and gain financial independence.  


There are several other things like hidden charges, annual credit card fees, and charges on cash withdrawals that you should read in the terms and conditions before signing up for the card. Although in the very early stages of your career, you should first build an emergency fund, start a SIP and build a corpus before buying luxuries. Developing a conscious financial mind could help you use a credit card without falling for the traps and to your advantage.

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