While the expression cash is king still rings true, many would agree that the next best thing to cash is a credit card.
What is a credit card?
A credit card is a method of payment which enables the cardholder to purchase goods or services without paying cash upfront. It is actually a type of unsecured loan where the cardholder can spend on purchases using the card based on a credit limit set by the card issuer.
The good side
Practical and convenient - Having a credit card allows you to buy almost anything even if you do not have enough cash on hand. As most cards are widely accepted across the globe, shopping overseas with a credit card would be a breeze.
Security – Buying high-priced items with a credit card will save you the trouble and danger of carrying huge amounts of cash with you when you shop.
Emergency cash – A credit card usually comes with a cash advance feature which allows cardholders to withdraw a certain amount of cash from the card issuer. This is especially useful during unforeseen calamities such as a medical emergency.
Savings and privileges – Nowadays, credit cards offer perks including cash back, reward programs or special privileges such as discounts at selective merchants. Cardholders can actually save money by using their credit card wisely.
The bad side
Overspending – Since shopping with a credit card is so easy, one might be tempted to swipe at every single opportunity. You could end up spending more than you can afford.
Risk of debt – By paying a minimum amount and not settling their full outstanding card balance or transferring their outstanding card balance to other credit cards, cardholders could end up with a ton of debt or potentially even face bankruptcy.
Interest payments – Interests will be charged on any outstanding credit card balances after the interest-free period. Hence, cardholders who do not settle their card balances on time will have to pay more for their spending.
Fraud – Carrying a credit card might be safer than carrying wads of cash around but this payment technology is still vulnerable to fraud. You might end up with bills which you did not swipe for.
Credit card vs. Charge card
Some people might think that a charge card is the same as a credit card because both cards enable cardholders to spend now and pay later. In fact, there are two major differences:
Payment - A charge card requires the card balance to be paid in full each month. Otherwise, late charges are incurred and card use may be restricted. A credit card only requires a minimum payment and the balance can be carried forward and interest is charged.
Credit limit – There is typically no spending limit on a charge card while only a specific amount can be charged to a credit card.
Having a basic understanding of a credit card is important before you actually sign up for it to avoid any possible future complications.