How to use credit cards and sleep well at night

Dime a dozen – the consumer market is flush with variety of credit cards. It started with Diners Club before Masters/Visa. Diners card was a premium card and then for everything else there was Visa. Credit cards provide easy access to consumers for online shopping, buying petrol/diesel, consumer durables such as TV, refrigerator, air conditioner etc. They seem to “increase “ your spending power but it in reality they are only deferring your outflow of cash. They are a double–edged sword. Managing your credit cards well can build assets, keep your credit rating (CIBIL Score) high & help you reach the financial goals you’ve set for yourself.

Convenience & other good reasons to use Credit cards – Credit cards are convenient to use – buying train/air tickets, online shopping i.e. Flipkart, Amazon and plenty of others, paying for your meal at a restaurant, utility bills like electricity, telephones/mobiles etc. can all be done using your credit card and from the convenience of your home. Many Cards offer cashback / reward points which can be used to purchase gifts.

There is more safety using credit cards – in case of fraud , you simply inform your credit card company and don’t pay for the transaction till the matter is resolved, but in case of debit cards the money is missing from your account immediately – it can take some time for the transaction to be traced and reversed . Grace period – using your credit card smartly can give you up to 45 days of credit e.g. if you purchase something immediately after your billing date . They are universally accepted at all hotels, malls etc. Also they can be used to build up your credit card score & ratings . If you manage your card well – payments on time. Payment should reach the bank/issuer by the due date so pay 2-3 days in advance to avoid unnecessary & high late payment charges – this is where they make extra profits

Downside

Risk of fraud if you happen to lose your credit card as cards can be cloned . So be careful where you use your card. If you are unsure of the place where you are using your card, do not let the card out of your sight when it is being swiped . Remember to take your card back.

The major downside is making impulsive purchases – Before making any purchase decide whether you can afford it & how are you going to pay the bill when it comes. Exceeding your debt servicing capacity which should be around 20% of your income can lead to a debt trap leading to high interest payments & even take over of the assets by the bank. Avoid impulse buying, aim to pay your balance in full by the due date of every month. If you make only minimum or part payments, you are paying heavy interest even as much as 40% p.a. If you tend to spend more than you can afford, use cash or debit cards instead

Precautions & using your card effectively

Evaluate the credit card before you take it. Comparing credit cards across issuers is a good away to decide whether you are getting the best deal or not. Check the various fees, reward points, other benefits like insurance etc. common fees are annual charges, late payment charges Finance charges ( interest charged if minimum or part payment is made ) , over the limit fees.

Pay off the full balance every month. If you are making late payment, inform the credit card company & ask for a waiver of any late fees. Stay within 30% of your credit limit. Use your debit card for everyday purchases like groceries etc. Have self discipline not to spend beyond your budget. Use reward points to your advantage . Reward point cards carry higher interest rates . So if you carry forward a balance , you lose the benefits & pay interest . Track your expenses & you will never be surprised by your bill . Use a log/diary or a money management tool like Perfios etc. & keep a track of every Rupee that comes in as Income & every paisa you spend as expenses. This will create a picture of your spending habits and you can also use the information to create a budget. Read your credit card bills check every transaction. If you see anything incorrect , inform the credit card company immediately.

So if you can use a credit card responsibly, you should not be using your debit card for anything other than ATM access. Else use cash or debit card. On the other side, good benefits are available for those who use their credit cards responsibly. Dozens of dimes await smart users.