Plastic Money – Pros and Cons

Plastic Money

Technology has changed the way we deal with money giving us more convenience and easy access to funds from anywhere. It all started with a simple credit card that allowed you to make purchases today and pay later.Further, technological advancements lead to a new trend where most banks gave you one ATM card or debit card which can be used for withdrawing money as well as for making purchases or payments – offline as well as online.

However, plastic money has its share of issues that one must be careful about. Plastic money definitely provides an alternative in some cases and compliments cash as a medium.

Convenience of Plastic Money

Peter, a young MBA graduate joins a large software firm as a Business Development Executive. His job involves frequent travelling and meeting with leads and clients to develop business for the organization. This requires him to spend a lot on travel, food, stay, etc and keep track of his expenses.

Since he may require a lot of cash for inter-city travel which can span a few days or weeks he preferred to use his debit card or credit cards.

For instance he could use his card to pay for hotel stays where cards were commonly accepted. Similarly for travel he could book tickets online, while for food he had to rely on cash.

However, with his debit card he could withdraw cash whenever required which made his life easier. Even if he forgets to carry cash he can use his debit card to withdraw funds whether required.

Advantages of Plastic Money

There are several advantages of plastic money as seen in the above illustration. The advantages include

  1. Eliminates the need for carrying huge cash: This eliminates the need for carrying huge load of cash which is risky and inconvenient too.
  2. Risk of Loss or Theft minimized: In case of cash there is a high risk of losing cash and a chance of cash getting stolen. However, in case of debit/credit card you can report the matter to the bank and block the card to avoid misuse.
  3. Anytime/Anywhere Access Using cards you have the unique advantage and convenience of using it anywhere in the country or even abroad.
  4. Credit Facility: In case of credit card you have the option of buying on credit or paying later. Although the charges are high, it helps you in case of emergencies and contingencies.
  5. Online Payments: You can use cards for online payments, fund transfers and various other transactions.

These are the key benefits which I can easily remember, but there could be various other good features too that are specific to certain cards.

Disadvantages of Plastic Money

So far I’ve been sounding like a nice, pleasant Bank Executive who is convincing you to open an account. Please note a few points before we look at the disadvantages of plastic money

  • Cards/plastic money is not a complete replacement for cash
  • Use of cards can also be risky in some cases

Note: I’m not saying that cards are not useful because of these drawbacks. The disadvantages are just to make you aware of any risks, threats, etc so that you can use it carefully.

Some of the drawbacks or risk related to cards are

1. Non-Acceptance at Small Retail Outlets

Unless you are a person who shops only in supermarkets and hypermarkets you will be forced to use cash

2. Cannot be used for all daily needs

You cannot pay your milkman, servant, paper wala (newspaper guy), etc by card.

3. Loss & Misuse

Once a card is lost you have to immediately report it and get the card blocked to avoid misuse. Sometimes when you are not aware that you lost the card….the chances of misuse is higher.

Mr. Dev, who was on a vacation returned home after 10 days. He was not aware of his card (which he lost during the trip). One fine day when he checked his bank account he found that Rs.75,000 worth of purchases have been made on his credit card. Too late. But this case is a little old.

Today lot of checks and balances have been put in place. For instance for debit card the customer has to key in the PIN for offline purchases, and additional passwords/authentication for online transactions. Even then taking precautions is absolutely necessary.

4. Low Value Transactions

As discussed above already there are cases where small and medium sized retailers don’t accept cards for low value transactions (say less than Rs.200 or other criteria). You may have noticed this even in case of outlets like petrol bunks or restaurants.

5. Service Charges

In some cases the outlets charge additional service charges for cards. So this can be another burden on your pocket.

6. Damage to Card

Sometimes the card’s magnetic strip gets damaged or scratches or cuts can render the card unusable. So keeping it safe and secure is very important.

7. Carrying or Keeping the Card

Keeping the card and cash in the wallet together is like “inviting trouble”. This is the way everyone (including me) used to carry cash and cards. But this means once you lose your wallet you lose everything.

So here the card doesn’t come to your rescue after losing cash. The best practice is to keep cash and cards separately so that if you lose one you have the other to bank upon.

By the way, nowadays I don’t carry cards in my wallet. Its mostly in the bag or sometimes in a different pocket. You can try this or other methods but ensure that you don’t keep everything in one place and lose it all.

Now that we have a clear idea of some of the drawbacks of credit and debit cards lets also look at some key points on how to strike a balance between use of cash, cards and control your spending habits.

8. Spending Habits & Other Tips

Whether you use cash or cards, having a control on your spending is very important. A few pointers would be worth noting.

9. Impulsive Purchases

Don’t yield to impulsive purchases. Try to see what real benefit or value are you getting from the purchase. If you can’t live without it you can postpone or keep the spending on hold.

10. Peer Pressure

Its okay to spend some money on entertainment, outing, fine dining, etc. once in a while (say once or twice a month).

But if you do it every week on instance of your friend, colleague, etc you will have not savings every month end. Your future financial planning is out of question if you live from pay cheque to pay cheque.

So its time to become smart and avoid unnecessary wasteful expenditure. Sometimes you may have to attend a few parties, dinner/lunch activities, etc but prioritize and attend only the ones which are important and add value to you. For others you can say sorry and avoid or try to finish it over a simple coffee.

11. Overuse of Cards

I find that people who are finding cards as a convenient medium try to use it everywhere – left, right and center. Further, they have 3-4 cards which are used one after the other at different places. I would advice them to have fewer transactions so that it is easier to keep a check on the transactions every month and easier to pay the bill as well.

12. Special Offers, Discounts

Some people have this fancy and think that they are smart when they get special discounts on cards at retail outlets.

Ha ha ha ha…… What a joke! Do you think the card company and the retail chains are so kind enough to serve you at a discount. They want you to loosen your purse and spend more so that they can laugh all the way to their bank.

13. Debt Trap

Overuse of credit cards and rolling over your balance is the shortest route to bankruptcy. Remember that you have to pay your credit card in full. If you know what this means in letter and spirit you will be careful while spending on your credit card. The interest rate on credit card roll over is as high as 3-4% every month which translates to 36%-48% every year.

14. Cash Management (Running to ATM often)

Most people particularly those who started their careers in the last 3-4 years have been more used to cards than cash. They don’t carry much cash and don’t keep cash at home too.

This is absolutely disastrous. When someone at home has a medical emergency or has to buy groceries or do some major repairs cash in hand is absolutely necessary. I’ve seen people who often run to ATM when they want to purchase some groceries.

Surprisingly some people don’t even keep Rs.1000 at home when they actually earn more than Rs.50,000 per month. This is just over dependence on cards, which is foolish, because you still need cash for most of your expenses.

Read more  at How to use Credit Card Effectively

Back up plan in case of Loss or Damage to Card

In case of loss or damage to card (making it unusable) you have to apply for issue of a new card. The new card can take a week or even more to reach you. Till then you need to manage with cash or rely on other debit cards. So two things to do to have a sound back up plan

  • One is to have sufficient cash at home to handle 1-2 months expenses
  • Two is to have two or more debit cards (separate bank accounts) so that you are not dependent on one source alone

I think talking about cash or cards may sound like a trivial subject, but remember that these precautions discussed above will help you during emergencies and help avoid or eliminate many problems that people face-not because of plastic money but due to lack of discipline and poor organization skills. So use cash and plastic money wisely to have complete peace of mind.


About the Author

Sridhar is a financial analyst and his work experience spans areas of financial analysis, modeling, valuation and research on companies, specific sectors, etc. Sridhar is an MBA graduate with Finance major from Maharishi Institute of Management.

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