Credit cards play a crucial role in everyday financial payments, offering multiple advantages for every expense made. Their popularity is evident, with over a million active credit cards in India. From attractive rewards to building a robust credit history, these financial companions are key in saving you money and maintaining a decent financial profile.
In this post, we will discuss key credit card advantages, who can use credit cards, and how to use a credit card correctly.
Top Five Advantages of Credit Cards
1. Credit Card Perks
Credit cards come packed with perks like exclusive discounts, cashback, and other brand offers. Each transaction earns reward points, which can be converted into air miles, cashback, or gift vouchers. These incentives provide a smart way to save on expenses, cover travel, or enjoy entertainment.
2. Building Credit
Credit cards are a gateway to building a robust credit score. Using them responsibly enhances creditworthiness, leading to easier loan access, higher credit limits, and lower interest rates. A good credit score empowers individuals to negotiate better loan terms, making significant purchases more accessible.
3. Easy Expense Tracking
Credit cards simplify expense tracking by recording every transaction. Monthly statements help in budgeting and tax planning. Real-time alerts keep users informed about spending patterns, fostering financial awareness.
4. Access to Instant Credit
Credit cards offer easy access to credit through deferred payments. It proves invaluable in emergencies or unexpected expenses, allowing individuals to navigate financial challenges without depleting immediate resources. Outstanding bills can also be converted into manageable EMIs for more significant purchases.
5. Interest-Free Periods
Credit cards provide interest-free periods, usually lasting 45-60 days. Banks don’t charge interest on the used credit limit during this time. By settling the balance within this window, individuals avoid interest charges, access short-term interest-free credit and enhance financial liquidity.
When Can a Credit Card Be Used?
Now that we know the major benefits of using a credit card, it is also important to understand when to use a credit card. Credit cards are a great way to access instant money when needed, be it any medical emergency, shopping, fuel saving, travel bookings and more. Let’s see the common scenarios:
1. An instant solution for emergencies
In financial emergencies, a credit card is a reliable backup when immediate funds from savings fall short. While it serves as a quick fix, establishing an emergency fund is emphasised to avoid sole reliance on credit. For instance, envision a scenario where your car breaks down, incurring substantial repair costs. A credit card can offer a quick solution, allowing you to convert these expenses into manageable EMIs for financial flexibility.
2. Maximising savings with huge perks
Credit cards are adorned with many incentives, including reward points, cashback, and discounts, providing an avenue for prudent savings. Leveraging credit cards strategically for these incentives becomes a smart financial move. Consider the example of movie buffs who can enjoy discounts on ticket purchases, translating into tangible savings on entertainment expenses.
3. Building credit for fast financial access
For individuals lacking a credit score, credit cards present a straightforward method to initiate and build a credit history. Responsible usage contributes to a positive credit score, opening doors to future loan approvals and favourable interest rates. Consider a scenario where someone with no credit history wishes to establish one – here, employing a credit card responsibly becomes a practical approach.
How do you use a credit card the right way?
1. Never Skip a Payment
Ensuring the timely payment of your credit card bill is a fundamental practice to maintain a healthy financial record. Missing payments not only incur penalties and late fees but can also inflict damage on your credit score. Even if you can only meet the minimum due amount, make it a rule to complete all payments to avert these repercussions.
2. Pay the Balance in Full
Paying your credit card balance fully is a strategic move to avoid hefty interest charges. Failing to settle the balance can lead to substantial interest payments, significantly exceeding the initial owed amount. Always prioritise spending within your means to eliminate the risk of accumulating interest and its potential financial strain.
3. Distinguish Between Needs and Wants
Intelligently using a credit card involves reserving it for planned purchases or unforeseen emergencies rather than succumbing to momentary desires. View your credit card as a short-term loan to yourself, a sum that demands swift repayment. This approach curtails overspending and shields you from unnecessary interest charges, promoting fiscal prudence.
4. Outsmart Impulse Buying With Credit Cards
Mitigating the impact of impulsive purchases is facilitated by avoiding using credit cards during such instances. Opt for a debit card instead to instil a sense of control over impulsive spending. By sidestepping credit usage in moments of temptation, you exercise financial restraint and safeguard your overall financial health.
5. Opt for the Optimal Credit Usage Ratio
Maintaining a credit card utilisation ratio below 30% is a strategic move to enhance your credit score and manage finances effectively. For example, if your credit limit is Rs 1 lakh, restrict your usage to Rs 30,000 (30%). Sticking to this limit implies responsible credit management, fostering a positive credit history and boosting your credit score.
Credit cards offer multifaceted advantages when used wisely, simplifying transactions and contributing to financial growth. Credit cards are versatile financial tools, from earning rewards to building credit and providing a financial safety net. Responsible usage is key; individuals should choose cards aligned with their financial goals. With careful consideration, credit cards can be ideal for achieving financial well-being.