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

The Unified Payments Interface (UPI) serves as a real-time payment system facilitating seamless fund transfers between two bank accounts through a mobile app. In India, UPI has gained immense popularity, evident from the staggering figure of over seven billion transactions processed in September 2023.

A multitude of UPI apps are 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. Additionally, several banks offer their own UPI apps.

To utilize UPI, individuals must download a UPI app and associate it with their bank account. Once linked, users can effortlessly send and receive money using their UPI ID or QR code. For users, UPI stands out for its convenience and security, providing an affordable payment method, with the majority of transactions incurring no charges.

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

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

Enhanced convenience: Integrating a credit card with UPI enhances the convenience of utilizing credit cards for smaller transactions. Presently, credit cards are restricted to transactions at establishments accepting them. Through UPI, credit cards gain versatility, becoming applicable for any transaction accepting UPI, encompassing online payments and peer-to-peer transfers.

Rewards: Linking a credit card with UPI enables users to accrue rewards on all transactions, irrespective of their value—a significant advantage compared to debit cards, which typically lack rewards programs.

For instance, many credit cards provide cashback ranging from one to five percent on all purchases. By linking such cards to UPI, users can earn cashback on every transaction, even those of smaller value. Additionally, numerous credit cards feature travel points programs redeemable for flights, hotels, and other travel-related expenses. 

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

Credit limit: Credit cards generally come with higher credit limits compared to debit cards. Consequently, individuals with a credit card linked to UPI can undertake more substantial purchases than they could with a debit card. This proves beneficial in scenarios where a user needs to make a sizable purchase but lacks sufficient funds in their bank account.

However, there are myriad disadvantages to linking one’s credit card(s) with the UPI. Some of them are:

Tendency to overspend: Associating a credit card with UPI may facilitate an increased risk of overspending. This is due to the nature of credit cards, allowing users to expend 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 highly convenient payment method, enabling users to make quick transactions with just a few taps on their phone. This convenience may lead to impulsive purchases without careful consideration. 

Secondly, the widespread acceptance of UPI by a diverse range of merchants, both online and offline, allows users to utilize their credit cards for various transactions, including smaller-value ones. This accessibility increases the likelihood of accumulating a substantial credit card balance without immediate awareness.

Chances of falling into a debt trap: Numerous credit cards feature enticing rewards programs, such as cashback or travel points, which can amplify the temptation to use a credit card for UPI transactions. Users might perceive these rewards as a benefit for their spending, even if they lack the means to settle the credit card bill in full each month. Utilizing credit cards with UPI raises the risk of falling into a debt trap.

High interest rates: Credit cards commonly come with elevated interest rates, ranging from 18 per cent to 48 per cent per annum. Failure to settle the credit card bill in full each month results in users incurring a substantial amount of interest on the outstanding balance.

Protracted non-payment of the credit card balance over several months can lead to paying more in interest than the initially borrowed amount, posing a significant financial burden. If contemplating the linkage of a credit card to UPI, it is crucial to acknowledge the typically high interest rates associated with credit cards.

The prudent use of credit cards is essential. Users should employ their credit cards for purchases only if they have the means to settle the entire bill before the due date. Failing to do so may lead to the risk of falling into a debt trap and a vicious cycle of exorbitant interest rates and subsequent penalties. 

Linking a credit card with UPI presents a convenient and potentially rewarding method for transactions. Nonetheless, users must exercise discipline in their spending and ensure they can comfortably settle their credit card bill in full each month to prevent accruing unnecessary and unwarranted debt.