Many people do not avail credit cards due to the fear of spending beyond their repayment capacity and landing in a debt trap. However, for those who can exercise financial discipline and follow good credit habits, credit cards can be an excellent tool for saving money and managing their finances.
Let’s look at 5 ways how a credit card can improve your financial health:
Builds credit score
As credit card transactions are equivalent to availing loans, credit bureaus also consider card transactions while calculating your credit score. However, unlike loans, credit card usage does not involve any interest cost as long as the entire outstanding bill is repaid in full by the due date. This makes credit cards one of the most cost effective and convenient way to build your credit score. Having said that, make sure to avoid exhausting over 30% of your credit limit as doing so can negatively impact your credit score.
Usually credit scores of 750 and above are considered as good and those having such scores have higher probability to avail loans and credit cards.
Some lenders also offer preferential interest rates and charges to those with a higher credit score.
Saves money through various credit card benefits
Credit card issuers try to incentivise card transactions in the form of reward points, discounts, vouchers, cash backs, etc. One can make most of such benefits by opting for credit cards whose reward points structure and benefits match their lifestyle and spending pattern the most.
For example, those spending huge amounts on fuel for commuting can save a considerable amount by opting for fuel credit cards while frequent shoppers spending considerable amounts on select brands can save more money by opting for credit cards co-branded with those brands. Additionally, many credit cards also offer various lifestyle benefits in the form of free access to lounges, complimentary club memberships, etc. Hence, always choose the credit cards whose potential monetary benefit surpasses the annual fee by the widest margin.
Also make sure to redeem accumulated reward points before their expiry. The reward points can be redeemed to purchase merchandise, vouchers and other services listed in the reward catalogue of your credit card. Some cards also allow the option to use your accumulated reward points to repay outstanding credit card dues.
Helps manage cash flows through interest free period
Interest free period is the time period between the date of a credit card transaction and the due date for its repayment. Card issuers do not charge any interest on credit card transactions during the interest-free period as long as your entire outstanding due is repaid by the due date. Usually the interest free period can range anywhere from 18 to 55 days based on the transaction date.
To make the most from the interest free period, try to time big-ticket credit card spends during the initial days of your billing cycle. Those with multiple credit cards can spread their card transactions among various cards in such a way that the majority of the card transactions fall in the start of the billing cycle of their different cards.
Allows financing of purchases and spends through credit card EMIs
Card holders who cannot repay their credit card bills fully or partially can convert specific transactions or their credit card bills in part or in full into EMIs. Similarly, those unable to make essential big ticket spends due to lack of repayment capacity can then get them converted into EMIs. EMI conversion facility usually comes with a loan tenure of 6 to 60 months, and card holders may choose a loan tenure depending on their repayment capacity.
Many card issuers also tie up with various merchants and manufacturers to provide EMI facility at lower or no-cost on their services and merchandise. In case of no-cost EMIs, the entire interest cost component of the EMI facility is borne by the merchant, and the card users are only required to repay the purchase price in the form of EMIs and the GST cost incurred on the interest component of the EMIs.
Some merchant tie-ups offer additional cash backs and discounts to credit card users availing no cost EMI option on select products and services.
Quick credit disbursal through ‘pre-approved’ loan against credit card
Credit card issuers offer pre-approved credit card loans to select card holders having good repayment history and credit profile. The pre-approved nature of credit card loans allows card issuers to usually disburse the loan amount within a few hours, without any additional documentation. This makes credit card loans an excellent tool for dealing with financial exigencies or shortfalls.
While credit card loans are usually sanctioned against the available credit limit of the card holder, some card issuers also offer an additional variant of credit card loan, which does not impact their available credit limit.
(The author is Director, Paisabazaar.com)