Wedding budget blues? Don't let credit card shopping steal your joy | Mint
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Business News/ Money / Personal Finance/  Wedding budget blues? Don't let credit card shopping steal your joy

Wedding budget blues? Don't let credit card shopping steal your joy

The joy of discovering a life partner should not overshadow the pitfalls of indulging in excessive shopping through credit cards. Despite the plethora of credit card offers, it's crucial to reflect on whether using a credit card for everyday purchases is the right choice for you.

Know how using credit cards for your daily purchases may harm you in the long run. (Pradeep Gaur/Mint)Premium
Know how using credit cards for your daily purchases may harm you in the long run. (Pradeep Gaur/Mint)

It’s wedding season, and families are bustling with preparations for the grand day. Given the attractive discounts and offers provided by credit cards on a range of purchases, it’s hardly astonishing that millions opt to use these cards. They prove invaluable in handling significant expenses such as wedding attire, catering, and venue rentals.

Credit cards possess a dual nature. They serve as a potent instrument for establishing credit, earning rewards, and facilitating convenient transactions. However, without caution, they can swiftly result in debt and financial downfall. Let’s dissect the dual facets of the credit card scenario.

Pros of using a credit card

Establishing credit: Ensuring timely payments with your credit card stands as one of the most effective methods to cultivate a favourable credit score. This practice can lead to cost savings on loans, insurance, and potentially even future rent.

Timely credit card payments play a pivotal role in constructing a positive credit score, unlocking a realm of financial advantages. Primarily, payment history holds substantial weight in credit score computations, usually accounting for approximately 35 per cent. A consistent record of punctual payments showcases your creditworthiness and dependability, resulting in a favourable score boost. Conversely, tardy payments can substantially impair your score, complicating eligibility for loans, insurance, or even future rental arrangements.

Rewards and cashback: Numerous credit cards provide rewards programs that grant points, miles, or cashback based on your expenditures. These benefits can accumulate swiftly, particularly when utilizing your card for day-to-day expenses.

The allure of reward programs can be irresistible, especially as you witness the accumulation of points or cashback. It feels like obtaining free money by merely using your credit card for everyday transactions.

Consider, for instance, credit cardholders gaining points, the most prevalent type of reward, acquired across diverse spending categories. These points can be redeemed for travel, gift cards, merchandise, or even applied as statement credits. Additionally, certain cards provide bonus points for specific categories such as groceries, dining, or gas, enabling you to optimize your rewards according to your spending patterns.

Miles prove advantageous for frequent travellers, enabling you to accumulate mileage points for flights, hotels, and car rentals. Certain cards provide miles for everyday expenditures, while others allow the transfer of points earned from different cards to airline or hotel loyalty programs.

The advantage of cashback offers is the most direct reward – you receive a percentage of your expenditures back as cash. Some cards provide a uniform cashback rate on all purchases, while others include bonus categories for specific types of spending.

Ease and safety: Credit cards provide a degree of convenience and security that cash cannot equal. Moreover, they enable payment for a broader spectrum of transactions, encompassing online shopping, in-app purchases, and contactless tap-and-go payments through advanced technology. Additionally, numerous banks offer budgeting tools and spending insights connected to your credit card, enhancing the ease of managing your finances.

In terms of security, the majority of credit cards are equipped with robust fraud protection features. In the event of a lost or stolen card, you are not held responsible for unauthorized charges, a benefit not shared by cash. Furthermore, should you encounter fraudulent charges, you have the option to dispute them with your bank and receive reimbursement, providing an additional layer of security compared to cash transactions. Several cards currently employ chip and PIN technology, enhancing their resistance to skimming and counterfeiting when compared to conventional magnetic stripe cards.

Cons of using a credit card

Unwanted debt: The interest on credit cards quietly looms beneath the surface of seemingly innocuous purchases, acting as a potential silent threat. While the undeniable convenience and rewards of credit cards are apparent, failing to settle your balance in full can propel you down a precarious path of financial challenges.

Do credit cardholders realize that each month, unsettled balances on their credit cards accumulate interest, usually at a rate varying from 15 per cent to 25 per cent APR? Essentially, this implies that you are paying a fee for borrowing money, and the more extended you carry a balance, the greater the interest accrues.

Interest is compounded, indicating that it’s computed not only on your initial balance but also on the accrued interest from prior months. This snowball effect has the potential to rapidly inflate your debt, making it more challenging to settle.

Even a modest unsettled balance can result in substantial interest charges over time. Elevated-interest debt has the potential to derail your financial objectives. It can deplete your savings, impede your capacity to establish an emergency fund, and potentially affect your credit score, making it more difficult to obtain loans in the future.

Inherently costly: Despite the undeniable advantages that credit cards bring, they frequently carry concealed expenses that can swiftly deplete your finances if you’re not vigilant. Being a well-informed consumer and thoroughly reviewing the fine print before committing to any card is essential.

Certain cards, especially those offering premium rewards or benefits, impose an annual fee. If you’re considering consolidating debt onto a card with a lower interest rate, take note of balance transfer fees, usually ranging from three per cent to five per cent of the transferred amount. These fees can offset any potential savings from the reduced interest rate.

Additionally, while using your credit card for a cash advance may be tempting, be prepared for substantial fees, often around 5% of the advance amount, coupled with high interest rates. It’s advisable to explore alternative options such as personal loans before resorting to this. Many cards also levy foreign transaction fees, typically ranging from one per cent to three per cent of the transaction amount. Consider cards with no foreign transaction fees or explore travel-specific cards with more favourable rates.

Propensity to spend more: The simplicity of swiping a plastic card can be a significant snare, enticing us to exceed our financial limits. It’s akin to having an unseen cash flow that can rapidly diminish, leaving us burdened with a stack of debt. It’s akin to possessing an unseen financial flow that can swiftly diminish, leaving us saddled with a heap of debt.

This occurs because when we make cash payments, the tangible act of handing over bills feels more tangible, heightening our awareness of spending. Contrastingly, with a card, it’s a simple tap or swipe, creating a disconnection from the actual value.

Moreover, the ease of credit can expose us to impulsive buying tendencies. Credit cards frequently present enticing discounts and rewards, adding to the blurred distinction between essential needs and discretionary wants. There’s a potential for justifying unnecessary purchases solely to accrue additional points or cashback. The pressure to uphold a particular lifestyle may contribute to overspending, particularly in social settings, where there might be a sense of obligation to use the card to avoid appearing thrifty or missing out.

In essence, credit cards can serve as a valuable tool, but they aren’t suitable for everyone. If you maintain discipline and adhere to a sound budget, they can be an excellent means of saving money and enhancing your credit profile. Conversely, for individuals prone to overspending or facing challenges in debt management, it’s advisable to steer clear of them.

Credit cards present both advantages and risks, contingent on how responsibly they are wielded. They prove to be powerful instruments for those with discipline and financial mindfulness. However, for individuals inclined to overspending or grappling with debt, credit cards can evolve into a precarious pitfall. The ease of usage and the allure of rewards may swiftly lead to unforeseen debt accumulation, unwarranted financial stress, and a compromised credit score.




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Published: 10 Dec 2023, 09:56 AM IST
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