The Pros and Cons of Getting a Credit Card
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With so many credit card options in the Kingdom, it is difficult to know what is right for you. A credit card can be a great financial tool if used correctly, but it can also lead to a lot of debt if you are not careful. In this guide, we will discuss the pros and cons of credit cards so that you can decide whether or not you need one.
Here are other guides that you may also want to check out:
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- Best Shopping Deals: 5 Steps to Get the Best Deals, Offers and Coupons
- Stock Investment: How to Invest in Stocks
- Bank Fraud: 12 Ways to Protect Against Bank Fraud
What's Covered
1. What is a Credit Card?
2. Five Important Things You Should Know
3. How does a Credit Card Differ from a Debit Card?
4. Key Features of a Credit Card
5. Benefits of a Credit Card
6. Disadvantages of a Credit Card
7. How to Use a Credit Card and Not Pay Any Interest or Profit Rate
1. What is a Credit Card?
A credit card gives the cardholder a set credit limit that they can use to make purchases or withdraw cash. The credit limit is like a mini loan. You can spend up to the limit but you then need to repay it back and until you do so, the credit card company will charge you interest or profit rate on the balance that is outstanding (the amount not paid back).
2. Five Important Things You Should Know
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Credit cards can be used in the same way as you use your debit card. However there are some important differences (see below).
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If you have a balance outstanding on your credit card, you are required to make a minimum repayment each month and then you will be charged interest or profit rate on the outstanding balance.
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At any point you can pay off the balance that is outstanding in full.
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The interest or profit rate is charged once the balance is outstanding for more than 30 days. Therefore if you pay off the balance in full within 30 days, you will not be charged any interest or profit rate.
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The profit rate charged on outstanding balances can be quite high and usually the credit card company will charge fees for withdrawing cash or making payments in a different currency
3. How Does a Credit Card Differ From a Debit Card?
| Debit Card | Credit Card |
|---|---|
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Provided for free when opening a bank account.
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Need to Apply for a Credit Card and may have a fee.
|
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Payments immediately taken out of bank.
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Payments are paid using a credit limit.
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As there is no credit, no profit rate is charged. |
Profit rate charged on credit balance that has not been repaid after 30 days. |
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Free or low cost to withdraw cash. |
Fees charged to withdraw cash and profit rate charged from the date of withdrawal. |
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Limited perks. |
Can come with perks. |
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Offers some customer protection on purchases. |
Offers higher customer protection on purchases. |
4. Key Features of a Credit Card
| Definition | Description |
|---|---|
|
Annual Fee
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This is the annual fee that you need to pay for the credit card. Some credit cards do not have an annual fee.
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APR (Annual Percentage Rate) |
This is the annual profit rate or interest rate that you would need to pay on any outstanding balance on the credit card.
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Balance |
This is the level of the outstanding balance on your credit card that you need to repay.
|
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Credit Limit |
This is the maximum amount that you can spend on your credit card. If you have reached your credit limit, you will need to make a payment to bring down your balance before you can make more purchases with the credit card. |
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Minimum Payment |
This is the minimum amount of your balance that needs to be paid each month. In Saudi, the minimum payment is around 5% of your outstanding balance. |
5. Benefits of a Credit Card
1. Credit Cards Can Be Used to Improve Your Credit Score
If you make purchases using a credit card and always repay the balance, this shows that you are good at repaying finance and therefore improves your credit score.
2. Airmiles, points, cashback and discounts
Credit cards offer perks such as air miles, points, cashback and discounts on anything that you spend
3. No profit rate to pay if you repay the outstanding balance in full in 30 days (excludes cash withdrawals)
If you pay your outstanding balance in full every month, you will not need to pay any profit rate. This does not apply for withdrawing cash where you are charged a profit rate from the date you withdraw cash.
4. Can be used as Emergency Finance:
A credit card is a level of credit that you can use at any time. This provides a good option if you need short-term emergency finance.
5. Better Customer Protection
If you don’t receive the goods you ordered or they are faulty, you have 180 days to file a claim with your bank that will refund the amount. Debit cards offer some protection but follow a different process and therefore disputes may be resolved faster with a credit card. Certain credit cards (such as Platinum and upwards) also offer additional customer protection on transactions.
6. Disadvantages of a Credit Card
1. High profit rate or interest rate payments
Credit cards charge a high-profit rate on outstanding balances, sometimes as much as 60% per year. This makes credit cards a very expensive form of borrowing.
2. High fees charged for withdrawing cash
Credit cards often charge high fees to withdraw cash and profit rate is charged from the day that the cash is withdrawn.
3. You can get Into a debt spiral
If you cannot pay the profit rate that is charged to your outstanding balance, this will be added to your outstanding balance and you will then be charged a profit rate on a higher outstanding balance. This can very quickly lead to unmanageable levels of debt.
4. If you do not keep up with payments, your credit score will be affected
If you fail to keep up with credit card payments, this shows you cannot manage finances well and it can deteriorate your credit score, which may make it more difficult for you to get finance in the future.
7. How to Use a Credit Card and Not Pay Any Interest or Profit Rate
Want to get all the perks of a credit card and improve your credit score without having to pay any interest or profit rate? All you need to do is these two things:
NEVER use your Credit Card to withdraw cash from an ATM
Setup a standing order to pay off your credit card bill in full within 30 days
MyMal Hero’s View
Deciding on whether to get a credit card comes down to financial discipline. If you can remain financially disciplined and pay off your balance in full every month, a credit card can have a lot of benefits. It you can’t do this, it might be worth avoiding a credit card or only getting a credit card to use in an emergency.
What's Next?
Want to look at other ways you could save on shopping? Here are 5 Steps on How to Get the Best Deals
Before taking out a credit card, make sure you are tracking your spending. A good way to do this is to Create a Budget
If you are using a credit card for finance, there maybe cheaper options to consider. Here are some Top Tips to Consider Before Taking Out Finance.
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