Before we delve deep into how to use a credit card for maximum benefits. Let me present by view on the on going debate about even having a credit card.
There are plenty of articles which state how a credit card leads to bad spending habits and pushes a person into debt.
This is like saying that a high performance car is responsible for road accident. Another popular viewpoint which is not right.
It is not the car which is responsible, rather the driver is responsible. Similarly, for using credit cards, you need to handle it well.
What is a credit card?
A credit card is an unsecured loan from a bank to you. Unlike debit card, which is directly connected to your bank account, a credit card is connected to your credit limit. This limit is decided by the bank.
In case of debit card, you can spend the money that is already in your account. This amount can change depending on your salary, income and savings. In case of credit card, your limit is fixed. A bank can offer to increase your limit with time depending on your spending habits, credit score and previous payment history.
How is the limit of a credit card decided?
Now, as mentioned, credit cards are basically unsecured loans from banks to you. Being unsecured loan means, bank need to follow due diligence to be able to offer such service to you.
Following are the factors decisive for approving credit limit for a customer:
- CIBIL score
- Salary details (Currently it is Rs. 15,000 per month minimum in India)
- Existing loan if any
- Your existing relationship with the bank ( which basically gives access to many of above mentioned details)
Above mentioned factors are used by bank to decide your risk profile. This is used to set initial credit limit to your card. Once the initial card allotment is done, this risk profile is regularly updated.
Hence you will see that sometimes you receive a credit limit upgrade offer within 6 months, and sometimes it is done after a year or more.
If you wish to apply for a credit card and want to know the best one for you, You can check out this list of best credit cards in India.
Benefits of credit cards:
I love credit cards. If you pay your bills on time, then they are interest-free short term loans. This is interesting, isn’t it?
Why should I be happy about such loan?
The reason is that that they help keep track of your spending much more easily than cash. On top of it, you have access to all the details of your transactions. For free.
Then there are multitude of ways in which credit cards can help you save money. A proper use of credit card can help you save more than Rs. 10,000-15,000 per year. Easily.
In fact, I have grilled through many credit card schemes to compile the list of best credit cards in India. They all have different rewards scheme, something you can use to save even further. The result is this list of best credit cards in India.
There are many more benefits:
- Complete details of your transaction history available online. You can use it to analyse your spending and see where can you save more money without sacrificing any comfort.
- Regular use of credit cards, responsibly, in planned manner is fastest way to improve your CIBIL score. Yes, that is correct. Credit card companies are most regular in sending updated data to CIBIL and their reports are taken more seriously as compared to other financial institutions.
- Cashback, rewards points ( convertible to different kind of perks), Flyer miles, Concierge services are some of the benefits that really bring you best buck back on your regular spendings. Read here about my experience with HDFC Regalia Card ( & Priority Pass). << Link to internal post.
- Easy zero cost (0) EMI on certain purchases. Companies are likely to offer best EMI offers to credit card holders as compared to someone opting for finance. Just have a look at payment options at Amazon that are available to credit cards.
- Several kind of insurances available at discounted prices or built into your card scheme itself.
There even more benefits if you chose a credit card based on your spending and then use it in tune with that.
Points to be careful about Credit Card
As with any kind of financial instrument, using credit card responsibly is something you need to keep on top of your mind.
Don’t extend your spending budget
It is easy to get carried away to buy the latest phone on no cost EMI. The monthly cost seems so less.
Well, if that monthly EMI cost is looking for less, add more to your SIP or something else to improve your finances down the line.
The point being, if there any consumer product which you can not buy with full downpayment right now, then probably it is out of your budget right now. Which means you are extending your budget for something that you may plan to sell next year.
Pay your monthly bill in full
Anything you spend on credit card in your monthly bill cycle is an interest free short term loan, till you carry the balance forward.
Which means, adding to the first point, don’t carry the balance forward. Pay your monthly bill in full. This can help you huge in keeping your CIBIL score high and saving you on the interest charges on your home loan 🙂
Don’t spend the full limit
Even if you are able to pay the bill in full, a good idea is to keep your spending on credit card to ideally 35-40% of the limit per month.
Even if you have to extend, keeping it below 75% should be your target. The exact reasons can be many, but spending upto your card limit is red flag for the bank as someone who is high risk spender.
There is nothing wrong with credit card and you actually improve your finances with this tool. For a salaried person, this can actually help as budgeting tool as well as saving extra on way of rewards and cashbacks.
What it requires is planned way of using it. Keep that in mind and you will keep adding to your reward points.