Whether its about shopping, paying our bills or doing any other purchase, many of us prefer to use credit card. A credit card increases our expanding power. Its kind of a short term loan in which you can spend now and payback later. But are credit really worth for everyone. Why credit card companies encourages everyone to have a credit card. What is their business model and how are they making profits.
How credit cards exactly works
So basically credit card allows you to spend up to the credit limit. And then the amount you spent can be paid later as your credit card bill. When you make any purchase by using credit cards your card details will be sent to merchant's bank. The bank then verifies the details with your credit card provider. Once the credit card network confirms the details, transaction get approved. And the transaction amount will get detected from the available credit in your card. In the end of every billing cycle your credit card provider send you a statement in which details like your previous & new balance, minimum due payment and due date are mentioned. You have to pay the bill within the due date after that you have to pay the interest as well.
Pros of having a credit cards
To attract costumers credit card companies use schemes like rewards, credit points and initial discounts. Also if you are very disciplined in your financial planning and pays your credit card bill timely then it can be helpful.
Cons of having a credit cards
The biggest con of credit card are their high interest rates. Also this is the way how credit card company generates revenue. First they will attract you to subscribe to their credit card by offering you rewards etc. Then they play with your psychology and make you expand more. They will give you offers and discounts on bulk purchase. Now once you become habitual of spending more than you earn, you will miss out your credit card payments frequently. Then you will be end up in indefinite debt spiral.
The other major disadvantage of a credit card is that if you miss out at your credit card bill payment then it will ruin your credit score. Due to this you will face difficulty in getting any other loans. And it could be a disaster if you require that loan in an emergency.
Do ultra rich people also use credit cards
Now most of the people have this misconception that only middle income and moderately rich people use credit cards. But most the ultra rich people use credit card as well. And for the rich people it is much more beneficial than middle class person. In fact its the rich people o actually got the benefit of credit cards. Let me explain this in little detail. You know very well that rich people has high net worth and they have high credit city. So they are offered some very premium type of credit card like Amex which offers high credit limit and better offers. Also the ultra rich has solid bank balance which earns them interest everyday so they don't mind spending on credit card and keep their bank balance untouched. Also most of the ultra rich people are more financially aware than normal people and hence they pay their credit card bills on time and rarely pay any interest.
My personal opinion on credit cards
I personally never used any credit card. If I had to make any big expense like car or home, i can opt for loan facility. But credit card is a big No. Because it always encourage you to spend beyond your income. Also it kills the motivation to earn more and ruin your financial discipline. There is a great saying from legendry investor Warren Buffet that you should earn before you spend. And how can you afford to play on credit when you are from middle or low income group. You have to always push for increasing your income sources then be dependable on credit. If you are young, just work hard. Work on more than one job. do side hustle or whatever you can but earn more. You should not be dependent on credit card to buy a new iphone or branded clothes. Credit card is beneficial if you already have good bank balance. But if you are a struggler and dependent on credit money for your basic needs just wake up. Credit card company wants you to be in debt. Its their agenda and that is how they make money. So do not fall into that trap.
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