Many people do not use credit cards for fear of spending beyond their ability to repay and falling into the debt trap. However, for those who can exercise financial discipline and follow good credit habits, credit cards can be a great tool for saving money and managing their finances.
Let’s see 5 ways a credit card can improve your financial health:
Builds a credit score
As credit card transactions are equivalent to loans, credit bureaus also take card transactions into account when calculating your credit score. However, unlike loans, there is no interest cost in using the credit card as long as the entire unpaid bill is paid off in full by the due date. This makes credit cards one of the cheapest and most convenient ways to build your credit score. That said, be sure to avoid depleting more than 30% of your credit limit, as this can negatively impact your credit score.
Usually, credit scores of 750 and above are considered good and those with such scores have a higher likelihood of receiving loans and credit cards.
Some lenders also offer preferential interest rates and fees to those with a higher credit rating.
Save money with various credit card benefits
Credit card issuers attempt to incentivize card transactions in the form of reward points, discounts, vouchers, cash back, etc. One can make the most of these benefits by choosing credit cards whose reward point structure and benefits best match their lifestyle and spending habits. .
For example, those who spend huge sums on fuel for daily trips can save a considerable amount by opting for fuel credit cards while frequent shoppers who spend large sums on certain brands can save more money by switching to fuel credit cards. opting for co-branded credit cards with these brands. Additionally, many credit cards also offer various lifestyle benefits in the form of free lounge access, free club memberships, and more. Therefore, always choose credit cards whose potential monetary benefit exceeds the annual fee by the widest margin.
Also, be sure to redeem any accumulated reward points before they expire. Reward Points can be redeemed for merchandise, vouchers, and other services listed in your credit card’s rewards catalog. Some cards also allow your accumulated reward points to be used to reimburse unpaid credit card dues.
Helps manage cash flow during the interest-free period
The interest-free period is the period of time 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 full due is paid by the due date. Usually the interest-free period can range from 18 to 55 days depending on the date of the transaction.
To get the most out of the interest-free period, try planning for large credit card spending during the first few days of your billing cycle. Holders of multiple credit cards can split their card transactions across different cards so that the majority of card transactions are early in the billing cycle for their different cards.
Allows financing of purchases and expenses through credit card EMIs
Cardholders who cannot fully or partially reimburse their credit card bills can convert specific transactions or their credit card bills in part or in full to EMI. Likewise, those who are unable to make large and essential expenses due to lack of repayment capacity can then convert them to IMEs. The EMI conversion facility typically has a loan term of 6 to 60 months, and cardholders can choose a loan term based on their repayment capacity.
Many card issuers are also partnering with various merchants and manufacturers to provide low cost or no charge EMI facility on their services and merchandise. In the case of a no-charge IME, the entire interest charge component of the EMI facility is borne by the merchant, and card users are only required to repay the purchase price in the form of IME and the cost of GST incurred on the interest component of the IME.
Some commercial links offer cash back rewards and additional discounts to credit card users who have the EMI option at no charge on certain products and services.
Quick loan disbursement with a “pre-approved” loan against a credit card
Credit card issuers offer pre-approved credit card loans to certain cardholders with good repayment history and a good credit profile. The pre-approved nature of credit card loans allows card issuers to typically disburse the loan amount within hours without any additional documentation. This makes credit card loans a great tool for dealing with financial demands or deficits.
While credit card loans are generally penalized against the cardholder’s available credit limit, some card issuers also offer an additional variant of credit card lending, which does not affect the credit card holder’s credit limit. their available credit limit.
(The author is director, Paisabazaar.com)