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How to make smart use of your credit card?

Updated: Mar 21

Credit cards have become an essential part of our daily lives. From eating at restaurants to shopping at malls or paying utility bills, it is used extensively. They are a convenient mode of payment and provide access to funds for an interest free period. The benefits of credit cards go beyond offering interest free float. Most people are not aware of these benefits and fail to utilize their credit cards to the fullest advantage. Here are a few tips on how to use credit card smartly to reap multiple benefits:

(1) Smart use of float: You can take maximum advantage of interest free period by planning your credit card purchases at the start of the billing cycle. So you get a maximum of 30 days float and a grace period which can go up to a maximum of 25 days. This means 55 days of interest free credit! If you are planning some big ticket purchase of over Rs.1 lakh, use your credit card to pay the bill. Then create an equivalent amount of fixed deposit for a 30 day period. If you have planned your purchase in advance, you can even create a fixed deposit for a 60 day or 90 day period to pay off the dues. This would earn better returns than the annual 4 per cent in a savings bank account. In this way, you not only fund your purchases for a certain interest free period, you also earn money on fixed deposit. Another advantage of this method is that it would instill discipline to keep funds ready in advance to pay credit card bills.

(2) Funding Financial Emergencies: Have you ever heard anyone paying hospital bills without spending a single penny out of own pocket? Yes, it is very much possible. To illustrate, a client underwent a hernia operation and his total bill came to Rs.40,000. He paid this bill via credit card and filed his mediclaim with the insurance company. By the time his credit card bill was due, he already received the mediclaim amount from insurance company! This was a smart way to fund hospital bills by using credit card.

(3) Reward Points: One of the prominent benefits of credit card companies is that they offer reward programme on purchases. These earnings are through reward points and are decided in proportion to the amount spent on using credit cards. The rewards also vary depending upon the type of credit card held. Today, the customer is flooded with multiple options for redeeming reward points accumulated on purchase through credit cards. Let us examine these benefits in general.

  1. You can redeem points for clothes, jewellery, household goods including electronic items, etc. Many cards also offer shopping discounts and vouchers.

  2. Many banks have tie-ups with retailers to offer benefits through co-branded cards. For e.g., HSBC has a tie-up with garments retailer Westside to offer benefits on HSBC Westside Credit Card. These include exclusive sale previews at Westside, complimentary gift vouchers on signing up, home delivery of altered garments, exclusive billing counters, more reward points compared to normal card holders, etc. Similarly, ICICI Bank has a tie-up with HPCL to offer fuel cards which provide discounts and cash backs when used at the time of refueling at designated oil filling stations.

  3. You can avail discount offers on movies or free tickets when paid through credit cards. For e.g., the SBI signature credit card has a tie-up with the entertainment portal Any customer booking movie tickets through this site and paying through the SBI Signature credit card is entitled to 2 free movie tickets per month or Rs.500, whichever is low.

  4. Many banks offer cash back offers on purchases. For instance, e-commerce portal, Flipkart has tie-ups with many banks to provide cash back offers for online shoppers.

  5. There are cards which allow you to accumulate travel reward points. These can be redeemed for flight, hotels, holidays, excess baggage allowance and a variety of travel benefits. They also provide access to airport lounges and airfare discounts/vouchers with travel partners and facilities like priority check-ins and air miles.

  6. There are lifestyle benefits offered like access to Golf clubs and discounts on dining at select premier restaurants.

  7. There are cards which offer benefits to specific categories of individuals. For e.g., HDFC offers customised cards for doctors and teachers. There are also cards designed particularly to cater to women customers.

Conclusion: Avoid impulsive purchases and do not spend mindlessly just to chase rewards. Weigh the benefits first and then spend accordingly. It is important to select the credit card which best suits your requirements. For instance, if your profession requires you to frequently travel by air or if you take short holiday trips very often, then you can use a card which has a tie-up with airlines and offers various travel benefits.

All the goodies offered by credit card come with a caveat – not to buy stuff for which you do not have the money. Do not just pay the minimum balance and roll over the outstanding amount, or else you will be charged hefty interest ranging from 24 to 40 per cent per annum. Further, the additional bills would not enjoy a grace period and will be charged interest from the date of purchase.

Credit card is the most expensive form of debt with interest rate in double digits. If you do not regularly track your billing cycle, there is a good chance you may fall into a debt trap which can take many years to come out of. Your bad credit history will affect your CIBIL score due to which you may not be eligible for any future bank loans when you need one badly. (more on CIBIL score in our next article). Huge credit card debt will reduce your propensity to save and invest and affect your future financial goals. Credit cards can thus devastate your entire financial cart if not used prudently. So do not buy stuff with credit cards which you cannot afford. If you have the discipline to arrange the funds in advance, regularly track your billing cycle and pay in full on time, then credit cards are for you! Otherwise you are better off using a debit card.

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