For young individuals, credit cards can be a helpful financial tool, but there are risks involved with using them carelessly. It's critical to comprehend the advantages and possible drawbacks of credit cards as an increasing number of young folks obtain their first one. Here are some of the main advantages and disadvantages of credit cards for young people.
Benefits
Credit history building: Starting to establish credit as a young adult is one of the main benefits of obtaining a credit card. Getting authorised for loans, renting an apartment, and even landing a job all depend on your credit report and credit score. A good credit history can be built by using credit cards sensibly, which includes keeping your credit utilisation low and making on-time payments.
Convenience and security: Using a credit card to make purchases is convenient, particularly when shopping online or booking a trip. In the event that your card is lost or stolen, they also provide greater security than debit cards. Zero liability provisions on a lot of credit cards shield you from unauthorised charges.
Perks and rewards: A few credit cards come with reward programmes that let you get points, miles, or cash back on your purchases. Others include benefits like access to airport lounges, rental car insurance, and extended warranties. Although benefits shouldn't be the primary factor in choosing a credit card, they can offer additional value if used wisely.
Dangers & perils
Debt and excessive spending: There is a counter-intuitive phrase which clarifies who should get a credit card: Only those who don’t need a credit card should get one. Having credit cards can lead to overspending and debt accumulation, which is one of the main risks associated with them, particularly for younger users. When you are not using actual cash, it's simple to lose track of your expenditures. Saving money and reaching financial objectives may be more difficult when there is a balance and interest to pay.
Exorbitant interest rates: Compared to other loan kinds, credit cards may have far higher interest rates. APRs on credit cards range from 16% to 20%, with certain cards having higher rates than others. Interest payments can add up quickly, particularly if you are merely making the bare minimum. Credit card debt can indeed be one of the worst forms of debt.
Fees: A lot of credit cards have yearly, over-the-limit, and late payment fees, among other costs. These costs can mount up rapidly and reduce the value of whatever benefits one may receive.
Identity theft: Credit cards are susceptible to fraud and identity theft even though they provide greater security than debit cards. Your card number may be used by thieves to start new accounts in your name or make unauthorised purchases. It's critical to routinely check your credit report and statements.
Advice for conscientious credit card use
Here are some guidelines for responsible credit card use if you decide to obtain one as a young adult: Each month, spend only what you can afford to pay off. So you should always have enough liquid money to pay off your credit card debts. Establish automatic payments to save late fees and improve your credit. Make sure that you are not using more than 30% of your credit limit. Regularly check your statements for any unapproved charges. Steer clear of financial advances because they usually come with hefty costs and interest. Recognise your card's terms and conditions, including the fees, interest rate, and rewards programme.
For young individuals, credit cards can be a helpful financial tool, but responsible and disciplined use is necessary. Young individuals can establish credit, receive incentives, and stay out of the traps of credit card debt by being aware of the opportunities and risks and adhering to recommended practices.
(The writer, a Fellow Chartered Accountant (FCA), specialising in Goods, Services tax, Transfer Pricing and Income tax, is the co-author of the book 'Comedium of Industrial Policy for MSMEs in Goa' released by ICAI)
