Credit cards have many advantages over other modes of payments. Although undisciplined swiping of a credit card can land you in a debt trap, its smart usage has several financial benefits.
Here are the top five reasons why you should use a credit card.
Improves credit score
Credit card usage is the most cost-effective and convenient way of improving your credit score. As credit card transactions are equivalent of taking loans, repayments of credit card dues have the same affect on your credit score as other loan repayments do. Moreover, unlike other credit facilities, using credit cards do not involve interest cost as long as the bills are paid in entirety by the due date. Hence, increased usage of credit cards and their timely repayments will help improve your credit score faster. Keep an eye on your credit utilisation ratio. This ratio is the proportion of your total credit card dues against your available credit card limit. Try to keep it between 30–40% as exceeding it may instead reduce your credit score.
‘Interest-free period’ refers to the period between the date of a credit card transaction and the due date of payment. During this period, the credit card issuer does not charge any interest on your transaction, provided your entire credit card dues are paid off by the bill due date. This period can range anywhere from 20 to 52 days, depending on the date of your transactions. Thus, your card issuer finances your transactions for free, earning you a notional interest benefit. Greater usage of credit card will mean greater notional interest benefit. Try to maximise your interest-free period benefit by making major credit card spends in the beginning of your billing cycles. In case you have multiple cards with different due dates, spread your transactions between them in way to ensure that all those transactions fall in the beginning of the billing cycle of the used card.
Easy EMI facility
Credit Card issuers have tie-ups with merchants and producers to provide easy EMI facility on purchases made through their cards. This facility is especially helpful for purchasing essential big-ticket items when your existing finances do not allow. Additionally, card issuers also allow you to convert transactions above certain threshold amount into easy EMIs. The tenure of such EMI usually ranges between six and 36 months. Routing more transactions through credit cards will also allow you to stagger repayments through an extended period in case of financial emergencies.
Loans against credit card are pre-approved loans offered to the existing cardholders with good credit score and decent bill repayment history. Being pre-approved, they have the fastest processing time of all loans as there is no documentation involved. Most banks disburse the loan amount almost instantly or maximum within a few hours. On the other hand, if you take a personal loan, it will require documentation and disbursal can range anywhere from two to seven days. The interest rates of loans against credit cards usually start from 11.50% per annum onwards and their tenure can go up to five years.
Credit card issuers offer attractive reward points, cash backs and discounts to promote regular usage. While cashbacks and discount offers directly reduce your cost of purchases, reward points can be redeemed for goods or services from partner stores. Thus, routing more transactions through your credit cards will help you earn more such benefits.
The author is vice-president,