Smart use of credit cards could help us in multiple ways, especially during challenging times. Here's a look at some of them.
Credit cards, when used smartly and responsibly, could prove to be excellent tools of money management. They also provide multiple benefits that could be extremely helpful when we face financial challenges. However, the bottom-line remains that you must never breach your monthly budget for card spends and ensure you always clear your total outstanding, not just the minimum amount due, during the billing cycles every month. Incomplete and late payments would attract additional interest charges that could offset any benefits earned through your card.
That being said, here are a few reasons why your credit card could be your best friend during financially challenging times.
Provide additional liquidity to bail you out of financial emergencies
Credit cards come with credit limits that provide short-term additional liquidity, something that could be immensely useful during financial emergencies. You can make use of it in booking urgent flight tickets or making any big-ticket purchases. Now, many credit card users are also eligible for instant card-linked pre-approved loans that usually involve quick disbursal which could also help in bailing us out of cash-crunch situations. The EMIs of such a loan get added to your monthly outstanding dues. Many big-ticket purchases made through credit cards are also eligible for easy EMI conversions making them easier to afford and repay. That being said, never spend more than what you could repay in time and get complete clarity about interest charges before signing up for a pre-approved loan or an easy EMI facility. Also, you might not want to consider going for direct cash withdrawal facility from credit cards even during emergencies as those involve steep interest charges and do not come with interest-free repayment periods.
Interest-free periods give more time to clear your dues
Credit cards in India come with interest-free periods ranging between 20-60 days. Repayments made during this grace period do not attract interest charges or late payment penalties. Now, this facility provides an additional lifeline to card users in making their essential or non-essential payments and purchases even if they are going through a short-term cash crunch caused by income delays.
Help in improving credit score
Difficult financial phases often force people to take unplanned loans which they struggle to repay in time. This adversely impacts their credit score which undermines their chances of getting the best available loan offers in the future. Now, timely repaying your total credit card dues can gradually help in improving your credit score. Disciplined card usage on a consistent basis showcases credit responsibility that holds you in good stead when you’re applying for a critical financing facility, like a personal loan or a home loan, in the future.
Card benefits and privileges help you save more on your expenses
Most credit cards come with their own set of benefits that could help you save more on your day-to-day expenses which become even more useful during phases that demand tightening of purse strings. These benefits could be in the form of cashback on groceries, online purchases or utility bill payments, reward points that could be redeemed to get discounts on emergency flight or hotel bookings, and so on. Not just that, often certain credit cards qualify for instant special discounts on purchases made at participating e-commerce websites, travel and flight portals, departmental stores, supermarkets, etc. Moreover, many credit cards come with additional privileges that could boost your savings. For example, complimentary lounge accesses, free travel insurance coverage and special discounts with participating hotel chains and airline providers could be of immense help during emergency travels.
However, you’ll be well-advised to choose a card whose benefits are best in line with your unique spending patterns to reap maximum rewards without breaching your budget. Also, get complete clarity about rewards riders like cashback caps, reward points validity and conversion options and rates, participating merchants, etc. to maximise savings.
As such, smart use of credit cards could help us in multiple ways, especially during challenging times. It won’t be wrong to argue that credit card benefits like buy now pay later, interest-free periods, cashbacks, special discounts, reward points, easy EMIs, pre-approved loans, etc. make them more useful than other payment channels like debit cards or UPI. However, credit cards should never be mistaken for income extension but only an ultra-short-term income replacement. The dues must be cleared in full on time on a regular basis. So, financial discipline is the key to maximising the benefits of these rather sophisticated tools.
(The writer is CEO, BankBazaar.com)