What are the pros and cons of linking your credit card with UPI?

There are many UPI apps accessible in India, such as Paytm, PhonePe, MobiKwik, iMobile, BHIM app, Airtel Money, Axis Pay, Baroda MPay, Pockets-ICICI Bank, SBI Pay, and Yes Pay. In addition, some banks offer their own UPI apps.

To use UPI, individuals need to download the UPI app and link it to their bank account. Once connected, users can easily send and receive money using their UPI ID or QR code. For users, UPI stands out for its convenience and security, providing an affordable mode of payment, with no fees involved in most transactions.

Initially, fund transfers to your UPI were limited to your debit card or savings bank account. However, the Reserve Bank of India (RBI) has recently authorized linking of credit cards with UPI. This development comes with its pros and cons.

The benefits of linking your credit card(s) with the UPI include:

Improved convenience: Credit card integration with UPI improves the convenience of using credit cards for smaller transactions. Currently, credit cards are limited to transactions at establishments that accept them. Through UPI, credit cards gain flexibility, becoming applicable to any transaction that accepts UPI, which includes online payments and peer-to-peer transfers.

reward: Linking a credit card to UPI enables users to get rewards on every transaction, regardless of value – a significant advantage compared to debit cards, which usually do not have rewards programs.

For example, many credit cards offer one to five percent cash back on all purchases. By linking such cards with UPI, users can earn cashback on every transaction, even those of lesser value. In addition, many credit cards offer travel points programs redeemable for flights, hotels and other travel-related expenses.

Integrating these cards with UPI allows users to accumulate travel points on every transaction, including smaller ones. Some credit cards extend various rewards, such as fuel points, dining benefits, and shopping benefits. Linking these cards with UPI allows users to earn such rewards on every transaction, irrespective of its value.

Credit limit: Credit cards tend to have higher credit limits compared to debit cards. As a result, individuals with a UPI-linked credit card can make more substantial purchases than they could with a debit card. This proves beneficial in situations where a user needs to make a large purchase but does not have enough money in his bank account.

However, linking credit card(s) with UPI has many disadvantages. Here are some of them:

A tendency to overspend: Combining a credit card with UPI may facilitate an increased risk of overspending. This is due to the nature of credit cards, which allow users to spend funds they do not currently possess, potentially incurring interest charges on their purchases. Several factors contribute to the ease of overspending when a credit card is linked to UPI.

Firstly, UPI provides a very convenient payment method, enabling users to make quick transactions with just a few taps on their phone. This convenience can lead to impulse buying without careful consideration.

Second, the widespread acceptance of UPI at a diverse range of merchants, both online and offline, enables users to use their credit cards for a variety of transactions, including smaller value ones. This accessibility increases the likelihood of accumulating a significant credit card balance without immediate awareness.

They may fall into a debt trap: Many credit cards have attractive rewards programs, such as cashback or travel points, which can increase the temptation to use a credit card for UPI transactions. Users may view these rewards as a benefit to their spending, even if they can’t afford to pay off a full credit card bill each month. Using credit cards with UPI increases the risk of falling into a debt trap.

High interest rates: Credit cards tend to have high interest rates, ranging from 18 percent to 48 percent per year. If the credit card bill is not settled in full each month, users incur a significant amount of interest on the outstanding balance.

Paying more interest than the amount originally borrowed could create a significant financial burden if the credit card balance is not paid off over several months. If you are thinking of linking a credit card with UPI, it is important to acknowledge the high interest rates that credit cards usually come with.

Judicious use of credit cards is essential. Users should only use their credit cards for purchases if they can afford to settle the entire bill before the due date. Failure to do so could risk falling into a debt trap and a vicious cycle of exorbitant interest rates and subsequent penalties.

Linking a credit card to UPI is a convenient method and may offer rewards for transactions. However, users need to control their spending and make sure they can comfortably settle their credit card bill in full each month to prevent unnecessary and unjustified debt.

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Updated: 16 November 2023, 05:21 PM IST

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