Growing up, I had three notions about credit cards.
- One can buy as many things as one wants, irrespective of the amount of money that is in the bank account, without any consequences.
- Credit cards are super expensive.
- Only rich people have them because they are the only ones that can afford to use them.
As childish as these notions might sound, they are in line with the perceptions that most people hold about credit cards.
So, is it wise to use credit cards then? Let’s dig around my childhood notions a bit before arriving at a definite answer to this question.
Notion 1: One can spend as much as one likes, regardless of bank balance
Needless to say, shoppers with credit cards check out with bigger baskets and make more indulgent, unplanned purchase choices. But can we really buy as many things as we want irrespective of our bank balance and not worry about the consequences?
Nothing could be further from the truth.
The simplest way to think of a credit card is that it is a type of short term loan. When you open a credit card account, your credit card company gives you a specific credit limit. This is essentially an amount set by the credit card company, based on your income, upto which you can utilise the card to make purchases or pay bills. Your available credit is reduced as you spend with the card.
At the end of your billing cycle, you will be sent a statement by your card issuer. This statement shows you all the transactions for that month, along with your previous balance and current balance, the total and minimum payment due and the due date of the bill.
Let’s say you have spent ₹25,000 on your credit card. The total payment due on the credit card would be ₹25,000, whereas the minimum payment due would be around ₹1,250. Paying the minimum amount due, which is usually around 5% of the total amount due, seems like a piece of cake. Your total outflow would just be ₹1,250. With as small an outflow as this, you are able to enjoy benefits worth ₹25,000! Wonderful, isn’t it?
Not really.
Like I mentioned earlier, consider a credit card as a short term loan. You get a 45-day window to pay for everything you buy. Not more than that. So you must maintain enough liquidity to be able to pay off your entire bill, not just the minimum amount. We’ll see why soon enough.
Notion 2: Credit cards are expensive
Surprise, surprise! This is a myth, but only in part.
First let’s understand what “Grace period” is. Grace period is the time between the date of a purchase on your card and the due date as on your statement. This period is usually around 15 days. Hence the 45-day window as we noticed earlier.
During this grace period, if you pay your bill in full, no interest charges accrue. That’s right, zero interest! But this is where a warning is an absolute must. If you pay the minimum due and carry forward the balance to the next month, your card issuer will charge you interest. And this interest is atrocious.
Your credit card’s annual percentage rate or APR reflects the cost of carrying a balance on an annualized basis. Your APR includes both your interest rate and other costs, such as an annual fee if your card has one. The interest rates can range from 3% to 4% per month, which approximately sums up to a hefty 40% or more annually. This is why credit cards are blamed for the growth in debt. And why they are seen as expensive.
Utilising your credit card effectively means you are getting a credit period at zero-cost. In order to never miss a due date, it’s a good practice to set an auto-debit mandate for your card. That way you are truly making the most of this tool and it really isn’t expensive.
Notion 3: Credit cards are only meant for the uber rich
When we count the benefits of credit cards, we tend to limit them to financing large purchases or foreign vacations. This gives rise to the notion that it is only the rich who use credit cards because they are the ones that have the purchasing power. The benefits though, are not confined to facilitating spending. Credit cards help you do a lot more than just buy things.
Benefits of Using Credit Cards
Credit Score
Credit cards are a great way to attain or improve your credit score. A credit score is a three-digit number calculated based on your credits and how regular you are in paying them back. Banks and financial institutions determine an individual’s eligibility for a loan based on the credit score, among other things. If you have a credit card and you pay your bills in full and on time, it is bound to improve your credit score.
Check you credit score here – https://cred.club/check-your-credit-score.
Rewards, Cashbacks and Offers
All credit cards offer special discounts, cashbacks or reward points for the purchases made using a credit card. Very often, cards are offered in partnership with retailers, shopping portals, travel agencies, airlines and many more. They offer special discounts on shopping, tickets and accommodation. So, paying with a credit card may ultimately be cheaper than paying with a debit card or with cash.
Worldwide Acceptance
Credit cards are a commonly accepted mode of payment across the world. When you’re in a foreign country, paying with a credit card is the most hassle-free way to transact, in addition to travel cards. You need not worry about currency conversions or withdrawing cash.
Useful in Emergencies
In case of medical emergencies or financial uncertainties for you or your family, a credit card can come in handy. Arranging funds can be tended to later on, after the emergency has lifted.
It’s clear that credit cards are not just for the uber rich. It’s for those who know how to use them well.
Spend Smarter
Credit cards no doubt reduce the pain of instant payment, but also release the brakes that hold our expenditure in check. While the monthly bills give you an insight into your spending patterns, I would suggest opting for a credit card only once you have a good hold on your spending habits. If used responsibly, credit cards can be a great credit-building tool. Not having too many credit cards, staying well within your credit limit and paying your bills on time and in full are all healthy habits to maintain lifelong. At the end of the day, getting a credit card can either be a great way to build credit and finance purchases or it can be an easy way to fall into a debt-trap — the choice is yours.
