How to use credit cards to your advantage

credit cards

When Rahul got a mail from his bank that he’s eligible for a free credit card with a decent credit limit, he was not sure if he should take that offer or not. He has read so many articles on credit cards, which have created quite a bad image of the in his mind.

He’s also seen many of his friends into a debt trouble, who put the blame of their misery on credit cards. All this make him feel that all source of financial evil is credit card only.

This is true to some extent but there’s another side to it as well.

There used to be an essay we were told to write during school days on “whether technology is a bane or boon”, and at the end it is generally concluded that technology by itself is a boon but its untamed usage can make it a bane. Same is the story with credit cards; you can either use it for your advantage or let it spoil your financial life.

Credit card is a wonderful product, which provides you convenience of not carrying cash, offers you interest-free loan, for a specified credit period and with the gain of online activities it helps you connect with the world by exchanging payments.

If credit cards are used wisely then one can surely enjoy the benefits, which otherwise are not possible if paid in cash. Some are as below:

Emergency support

No, it is a not a substitute for emergency fund, but it will certainly help when emergency fund falls short of requirement. But one should keep in mind that since credit cards are an easy available credit line with very high interest rates, so it should be paid off in complete before due date.

To manage emergency, your finances should always be in order, by having adequate emergency fund in place, and keeping most of the investments in liquid form. When there’s a time lag between making immediate payments and regaining the liquidity as redemption of investments takes time, then credit cards comes to the rescue and provides you with required liquidity.

Discounts, cashback and reward points

Though discounts and cashback should not tempt anyone to splurge, but still if one spends within budget then there’s no harm in enjoying the discounts and cashback offers available with credit cards.

Many credit cards offer discounts and cashback on payment of utility bills, purchase of fuel etc. Some offers extra reward points on buying grocery or doing shopping through specific shops or portals. You can then redeem these accumulated reward points to buy any other item of your use or may also adjust these points with the payment due.

Now these discounts or cashbacks would not have been yours if you pay through cash. But do keep in mind that you have to spend within your budget and don’t let these offers disrupt your financial planning in any way.

EMI conversion

Many times, especially during festive season many sellers or even websites offers interest-free EMIs for specific tenure on different products.

Due to competition and increase in awareness about the calculation behind zero interest rate schemes, sellers these days are taking the burden of interest rate on themselves and sometimes offer true interest free EMI facility to the buyer.

This EMI facility should only be used, when you have enough money available with you to fund that purchase. In other words this interest-free facility should not be the reason to spend unnecessarily. Buy only those things which you otherwise also would have bought, should be bought.

You may invest the amount available with you in some liquid fund and keep on withdrawing at regular intervals to fund those EMIs. This way, on one hand you are saving on EMI interest payments and on the other hand receiving interest on investment too.

( Read: Don’t leave your cash idle, use debt funds)

Helps in building credit score

No, credit score may not be a hindrance in getting loan but low credit score will always be. And having a good credit score is an advantage over no credit score.  Here again, credit cards can be used for building a credit score.

Credit cards are a type of unsecured high interest loan. If you use this product regularly and also clears off the outstanding on time, this helps in building your credit score and regular repayments depicts a good credit behaviour.

But here again you have to be cautious enough so that you should not get your credit score spoilt. Excessive use of credit card and always staying on upper side of credit limit depicts a credit hungry behaviour which is negative for your credit score.  Thus, you may use your credit card regularly but within limits.

(Read: How to improve your credit score)
Credit cards are normally termed as a tool for mass destruction. While buying through credit card, buyers don’t feel the pain of paying and tends to buy more than what is required. Sellers make various offers and even card companies offer different EMI and discount schemes, which further tempt the buyer to buy more. When she realises the mistake and figures out that she doesn’t have enough to pay the card company, she resolves the credit by paying due minimum and slowly finds herself in a debt trap. But this is a kind of self-inflicted injury.

But when credit cards are used wisely as a tool to ease out payment mechanism, as support towards emergency fund and also to help build credit score then you are using it to your advantage and will never find yourself in a fix.

The original article was published in Business Standard dt. Feb 4, 2016

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