The word ‘credit’ is generally associated with someone resorting to pay later for his spends. While the same is certainly acceptable in a commercial transaction, someone doing it for personal expenses reflects the tendancy of an individual spending more than what his pocket can afford. Such a tendancy is indeed disastrous for someone’s financial health. On similar lines, instead of seeing it as money management tool, credit cards are generally seen as a financing instrument in India to spend for expenses to pay later.
However, people are still reluctant to use credit cards for their routine transactions due to its vulnerabilities to fraud and misuse. People indeed have lost money in such frauds, but most of the cases are attributable to negligence on part of the users. Further, with a pre-sanctioned limit with normally zero collateral security, it allows access to more funds than what our earnings are. While this can be a positive factor in the case of emergency, spending more than the incomes is always dangerous.
Inspite of these negatives, here’s how credit cards can be used for all the advantages and benefits they offer:
- Interest-free Credit Period – While credit cards are generally one of the highest interest cost loans, credit cards typically allow a credit period of 15 to 45 days from the date of transaction before they charge any interest. Within that payment window, the amounts paid remain as interest-free credit. Using this credit facility for our routine expenses can infact be a great money management practice.
Let me use some figures to help you understand. Assuming you have monthly expenses of Rs. 15,000 which you pay through credit card instead of using debit card. Even if you pay the credit card dues well within due dates, you stand to gain around Rs. 900 per year just by using credit card, by earning interest for the money lying in Savings Account in the meantime. Earning money with no extra effort, howzzat!
- Building Credit History – Credit card usage helps in building credit history and paying credit card dues timely results in a high credit score, thereby helping get easy access to bank credit in case one needs to borrow money later e.g. car loans, housing loans etc. This is due to the fact that credit card usage and payment history is reported to the credit information bureaus. Payment records through debit cards don’t help in building credit history.
- Joining Bonus – Many banks offer joining/ signup bonus to incentivise people to apply for their credit cards. This is done to increase the customer base. However, it indeed feels nice to get some freebies for just applying a card, ofcourse using a credit card has its own advantages as explained above. I just received a Rs. 1000 bookmyshow.com voucher yesterday as a signup bonus. So, movie anyone?
- Usage Perks – Different credit cards offer cashbacks/ reward points for usage at different websites/ stores. So, depending on the type of credit card you hold, you stand to gain 0.25%-10% on your payments through the credit card as per the offers running at that time. It’s not that debit cards don’t provide such incentives, but it has been generally seen that credit cards are incentivised more than debit cards.
However, using credit cards to our advantage, it is also imperative to use credit cards responsibly and more importantly, pay credit card dues on time. I resolve to do that. Will you?
Check out the A2Z of Personal Finance here.