Disadvantages of Credit Cards

Disadvantages of Credit Cards

A credit card is a small plastic card issued by a bank, building a society, etc., allowing the holder to purchase goods or services on credit. It is a type of payment card in which charges are made against a line of credit instead of the account holder’s cash deposits. Here describe Advantages of Credit cards. Knowing some of these can help you decide to do or do not want to use credit cards.

Disadvantages of Credit cards –

(a) Blowing Your Budget – The biggest disadvantage of credit cards is that they encourage people to spend money that they don’t have. Most credit cards do not require you to pay off your balance each month, so even if you only have $100, you may be able to spend up to $500 or $1,000 on your credit card. While this may seem like ‘free money’ at the time, you will have to pay it off and the longer you wait, the more money you will owe since credit card companies charge you interest each month on the money you have borrowed.

(b) High-Interest Rates and Increased Debt – The interest rate charged by a loan on cash credit is very high. Credit card companies charge you an enormous amount of interest on each balance that you don’t pay off at the end of each month.

(c) Credit Card Fraud – Like cash, sometimes credit cards can be stolen. They may be physically stolen (if you lose your wallet) or someone may steal your credit card number (from a receipt, over the phone, or from a Web site) and use your card to rack up debt.

(d) Minimum commitment charges – A minimum commitment charge is imposed on the borrower regardless of whether the company utilizes its cash credit or not.

(e) Less Purchase Protection – When you use a personal credit card, most credit companies will offer purchase protection. However, business credit cards often do not have that same protection.

(f) Difficulty in securing – The short-term loan is extended to the borrower depending on the borrower’s turnover, accounts receivable balance and expected performance, collateral security offered, etc. Therefore, it can be difficult for new companies to obtain. Also, you must implement strict policies about who can make purchases on the card, and what constitutes an authorized purchase.