Whenever I write about credit cards, I focus mostly on things that can go wrong when you use credit cards indiscriminately. You may end up spending more than you can afford to. The debt can suddenly pile up if you don’t pay bills on time as the interest rate charged is exorbitant.
In this post, let’s change track. Not everything is wrong with owning a credit card. Owning a credit card has its own set of advantages if you use your credit card wisely. Let’s look at some of those advantages.
[pullquote]ADVANTAGES OF CREDIT CARDS
Build credit history
Avail exclusive discounts, cashbacks and rewards
Fund an emergency
Take advantage of interest-free credit period
Track all your expenses in one place
#1 Helps You Build a Credit History
Timely repayment of your credit card debt affects your credit score. And a good credit score can improve your chances of getting a loan. Not just that, we may not be very far from a scenario where loan interest rate will also depend on your credit score. In fact, at least, one bank has already linked home loan interest rate to your credit score. To have a credit score, you need to create credit history. For that, you need to avail credit. A credit card is a very simple way to do that. After all, you wouldn’t take a loan just to build credit history. And a loan comes at a cost. You can use your credit card with a little restraint and pay your bills on time. This will help you build credit history and improve your credit score. However, this can be a double edged sword. If you are not disciplined with your credit card spends, this approach can backfire. If you don’t pay your credit card debt on time, not only will it affect your credit score adversely, it can also lead to a debt trap.
#2 Rewards and Cashbacks
Many a times, you will see upfront discount offer on purchases if you make the payment from a specific credit card. And there are cash back offers too. You will also find card specific discounts on airline tickets and at restaurants. It is not uncommon to see discounts on purchases on leading e-commerce portals such as Amazon, Flipkart, Snapdeal, Jabong and FirstCry if you make payment through a particular credit card. I have myself availed discounts and cash back many times. This reduces the cost of purchase. If you can purchase a mobile for Rs 18,000 by paying through your credit card or for Rs 20,000 if you pay through a debit card or net banking, which option will you choose? I would use my credit card. Even if you do not like to buy items on credit, you can make the payment using your credit card and transfer the amount from your bank account to your credit card account immediately after. That is a neat saving of Rs 2,000. Why wouldn’t you use this option?
There are reward points and frequent flier miles too. You can use the accumulated points to buy an item from catalogue or purchase airline tickets. However, in my opinion, benefit through reward points pales in comparison to upfront discounts and cashback offers.
#3 Emergency Can Strike Anytime
If an emergency happens on a weekend or a bank holiday, you may not be able to liquidate your mutual fund units or break your fixed deposits and get money in your bank account. In any case, money comes to your bank account only the next working day in case of liquid funds. If you do not have enough money in your savings bank account, what do you do?
Credit cards can be quite useful during times of emergency. You can swipe your card and make the payment in case of a medical emergency. Subsequently, you can liquidate your funds or break fixed deposits earmarked for emergency to settle credit card debt. Even if you do not have any emergency funds, you still get some time (interest free credit period) to arrange funds to settle your bill. A credit card cannot replace your emergency fund requirement but it can certainly augment your emergency planning.
#4 Interest-Free Credit Period
With credit cards, you can get up to 52 days of interest-free credit period. You may use this feature to manage temporary cash flow mismatches in your accounts. Though your financial life will not change much because of this feature, it is still good to have interest-free credit facility.
#5 Maintain Record of Expenses
If you make all your spends on a credit card, you will have a detailed list of your expenses in the form of credit card statement every month. You can analyze your expense items and assess if you have been spending too much. If you notice too many swipes at restaurants while you struggle to make investments, you know how to remedy the situation.
Conclusion
We have seen that a credit card offers a number of advantages. Therefore, if you do not have a credit card yet, you should consider applying for one. However, a credit card needs to be used judiciously. You may have taken a credit card just to build your credit history or to swipe in cases of emergency, but it is not difficult to veer away from the path. There will be a number of baits along the way in the form of interest-free EMIs and other innovative offers. You must resist the urge. Do not spend more than you can afford to. A credit card gives you the power to spend but you need to use the power responsibly.