Did you like me grow up believing the tale of ‘aish hi aish’ once you score well in your board examinations? Later, the condition was graduating from a renowned college, followed by a decent job at an MNC, succeeded by your first promotion. I think we couldn’t comprehend what the coveted ‘aish’ is. Maybe, it meant an exponential growth of responsibilities, lack of time with friends & family, skipping meals because you can’t skip deadlines, and dealing with a new variant of back pain, every other day. We didn’t sign up for adulthood for this, did we?
Apologies for the rant; I just needed one before I can focus on what I’m grateful for. I got the first taste of having arrived in life when I got my first credit card. It felt like the bank was validating my sincere hard work through the years by offering me a card that would let me enjoy the rewards before I earned them. The first swipe of the card was no short of magic. My heart was as full as my bags and wallet were.
As much joy as the credit card brought me, it had garnered a negative reputation over the years. I was told by many well-wishers and seasoned professionals that it makes you spend beyond your means. Some went so far as to say that frequent usage of credit cards makes you an addict and you can’t seem to get through life without swiping it on every occasion.
They weren’t wrong in warning me against the unregulated usage of credit cards. However, over the years, I realised that the cynicism around credit cards is due to lack of awareness about its optimum utility. I wish I learnt to use this financial wand earlier as I do now. But, I’d make peace with not knowing better by ensuring that you do.
A credit card is as much of a boon or bane as the user wants it to be. Let’s begin with the basics. Your credit card allows you to spend first and pay later. Basically, you purchase a product, or enjoy an experience before you pay for it. Now, you may wonder, why would I do that when I could use my debit card, netbanking, or cash to make the payment?
Fair question. We grew up on the ant & cricket fable that taught us, “Neither a borrower, nor a lender be”. On using your credit card, the money in your bank stays intact and earns interest. While the interest compounds, you can pay off your dues to the bank (before the due date) so that you’re a borrower no more.
A smart way to use your credit card is to plan your spends in a way that you transact on the first day of your billing cycle to get up to 50 days of an interest-free loan. Don’t get carried away though. This is a free facility, not free money. Ensure using only as much of your credit limit as you could pay off entirely when the bill is due. The amount you won’t pay would accumulate interest resulting in a higher amount payable in the next billing cycle. This interest charged to you is 4 to 8x the interest you earn from your savings account so you can’t be the David to this Goliath. Pay in Full or don’t play this game at all.
Here are some other reasons credit cards will drain you financially.
Never miss a payment as there are high fees associated with it and I spoke about the penal interest rate already. This also impacts your ability to borrow from other sources as it hampers your credit score.
Going over the top will bring you to the bottom. Despite the credit limit set, credit card companies, unless you have opted out, will let you exceed this limit. Why, you ask? Well, there is a fee for this. Plus the more you can’t pay, the more interest they earn. It is the beginning of a debt trap. This also impacts your credit score negatively. We’d touch upon why your credit score is just as significant as your HSC score, in one of the following blogs.
Here is how to avoid getting into this trap in the first place.
~ Opt out of this over the limit option when applying.
~ If ever you have to exceed this limit to avail any offers or discount, pay off your existing balance before swiping
~In fact, avoid using more than 40% of your credit limit to ensure you aren’t classified as credit hungry.
~You should also be cautious against conversion to EMI and BNPL unless you have good experience in managing your credit cards.
~If you do happen to go over the limit, get the balance below your limit by paying partially and getting to the credit limit below 40%. Most companies report to the credit bureau on the 30th of the month so as long as you are below the limit, it won’t hamper your credit score. The over limit fee will still be chargeable.
The obvious question which follows is what do I do when I want to use more than 40% of my credit limit? Diversification to your rescue! Have 3 to 4 credit cards intended for different purposes. More on this after we discuss how credit cards add value.
Whoever thought of credit cards first certainly believed in the joy of giving. Not only do credit cards let you spend the money that’s not yours, you get to earn reward points each time you spend. These reward points make me fly! No kidding. The reward points convert into air miles that I redeem to avail free flight tickets. They can help you with discounts on your purchases, fuel, provide lounge access and more. When you pay your credit card bill on time and in full, you avoid late fees or interest accumulation and build an excellent credit score.
You know how rampant financial frauds are in the digital era. While you must always be wary of fraudulent transactions, credit cards intuitively flag them (using fraud analytics) before you fall prey to them. You’re not only more likely to be saved from such frauds, but also highly likely to recover the money if you happen to lose any. Since you’re given a short-term loan, the lender is as inclined towards safeguarding the money as you are.
One of the ways to be more vigilant is to download the credit card app, and set a daily transaction limit (close to a minimum). Turn off contactless, international transactions and temporarily turn them on when making a purchase. Contactless transactions are difficult to dispute so let go of the convenience of tapping your card. Amitabh Bachchan also uses limit management to safeguard the add-on card used by his granddaughter in the RBI advert.
Speaking of add-on cards, you can get them issued for your family members. As most credit card companies, treat them as separate cards, say hello to getting double the benefits. Add-on cards can help young people with the discipline of using one before venturing out on their own and I personally use them for my parents to get 3x the benefits of lounge access, flight offers and more mostly without any additional fee.
God forbid, but if you’re amid a medical emergency, the last thing you need to be worried about is arranging funds. Owning credit cards could save you a great deal of stress and running around in such a situation. Ensure you say ‘yes’ to the credit enhancement offers as your income grows on one of the credit cards you own as it forms a part of your temporary emergency fund.
Why temporary you ask? Well. Just because you used it in an emergency doesn’t mean the above rules don’t apply. You still need to pay the bill in full when it is due to avoid penal interest rates. Dip into your emergency fund and pay it off. Remember credit cards are the worst emergency funds if they are the only emergency fund you have.
So now let’s dive deeper into the 40% credit limit and diversification. Once you have acquired the discipline you can own about 3 to 4 credit cards. You may opt for Visa, Mastercard, American Express and Rupay. All have their own advantages and disadvantages which are driven by your personal usage.
This is how I manage my 3 credit cards and their usage. If you don’t follow the Indian Premier league (IPL) you may not understand the nomenclature.
Most Valuable Player (MVP)
As the name suggests, this is my most utilised card and I pay an annual membership fee for it. I earn 2 to 3 free tickets a year by using this card for most of my spends to accumulate reward points. In addition, there are multiple discounts on flights and hotels on flight aggregator websites giving me a handsome return on my investment (6 to 7x including the free flights).
The cherry on top is that it has one of the best duty free offers at the airport in addition to free lounge access. The secret to maximising the reward points is to accept credit limit enhancement when offered periodically as your income grows as well as using the redemptions towards flight tickets only. The ₹ value is sometimes 50% when redeeming towards normal reward partners like gift vouchers etc. I keep the overall transactions limit set at 40% and daily transactions limit set to ₹5,000. International transactions are only towards travel bookings and turned off whenever not in use as the card has a higher foreign exchange markup. Contactless is permanently disabled.
The Wicket Keeper
As the name suggests, this card is meant to be a safety net. It has no annual fees and I use this card for all online transactions from netflix subscriptions to online shopping at Amazon and more. This one has the lowest credit limit. I don’t enhance this limit because it is the most susceptible to financial frauds given it is stored for subscription purposes and also most frequently used across e-commerce websites. Contactless is permanently turned off and only used physically when there are card specific discounts or if I am unsure of the place I am using it at. I specifically opted for a low credit limit. This card was also chosen based on offers across shopping and utility platforms like urban company, zomato which I use regularly.
The Impact Player
This one is my backup card which I use wherever it creates value. It has a credit limit much lower than the MVP but 3x the Keeper. I say ‘no’ to credit limit enhancement and ‘yes’ to discount offers online, to fuel pumps as it waives off any fees, free lounge access in places the MVP doesn’t open (lounge) doors for me, to non travel international transactions (due to low foreign exchange fees) and to contactless transactions. Needless to say, international and contactless transactions are disabled when not in use.
The Home Grown Talent
My 4th one is going to be a local homegrown talent we all should be proud of! Can’t wait to get my hands on the Rupay powered card especially as it now is linked to the Unified payments interface (UPI).
So, you see, nothing is either good or bad; your perception of it makes it so. Credit cards, if used mindfully, can not only help you manage your funds, but can also enhance your savings, and create a credit score that would ease your life in various ways. Having said that, I’m not pursuing you to use credit cards if you aren’t comfortable with it. By the end of it, there’s nothing as fulfilling as the contentment of making informed decisions.