Credit Card – Friend or Foe?
Updated: Jan 29
I remember when I first got a credit card 15 years ago (it came free with my salary account), I hid it in the drawer for 2 years. I thought the only reason my name was printed on that flashy piece of plastic was to ensure I overspend and save no money. That’s what most people think, right?
Though over the years my own perspective on cards has changed and the enemy of the past is now a friend. With the right knowledge and usage, credit cards can not only help us save money but also reward us in multiple ways.
Here are 5 ways a credit card can be a friend:
1. You get a free credit period
When we pay using a credit card, we are essentially paying the bank’s money instead of depleting our own cash balance. Different credit cards give a free credit period between 30 to 50 days. This can be very helpful at times. For example, when you have to pay a security deposit to rent a self-drive car or guarantee when staying at a hotel. Typically, if you use a debit card the funds in your bank account get blocked thus affecting your liquidity.
2. Credit cards can help save money
We all keep hearing that a credit card induces an overspending behaviour but the one benefit that comes with using a credit card is the amount of money you can save via cashback and discounts. For instance, every month I save ₹1000 on BookMyShow by just purchasing movie tickets on my credit card. And that’s not all, cards can help you save money on everyday spends with all the offers they keep running all the time, like, ordering food via Swiggy and Zomato, monthly grocery shopping on Big Basket and online shopping on Amazon, Flipkart, Nykaa and so on.
3. Credit cards earn reward points
Picture this, every month you and your partner watch a movie and book your ticket online on BookMyShow. You choose to pay with your debit card or net banking and get nothing in return for your debit spend. On the other hand, I use my credit card to book the same tickets. Not only does my credit card saves me money by giving me a 500-rupee discount due to its buy-one-get-one-free ticket promotion, but also earns me air miles. The same ₹1000 movie tickets now cost ₹500 and also earn me 20 air miles. To put it simply, spending on the right credit card can not only save money but also earn multiple rewards and benefits. Credit card points can be redeemed for travel, online shopping vouchers and you can even convert it into money and use it to offset your next bill. Some credit cards also offer benefits like airport lounge access, extra baggage allowance, free flight tickets, etc.
4. Use your card as an expense tracking tool
Unless we memorise or note it down, it’s very hard to keep a track of cash expenses. My husband and I diligently use our credit card statements to keep a track of our spends and understand our spending patterns.
5. Credit cards offer dispute protection
Another reason, I like to use my credit card, especially for high-value purchases is the extra layer of protection they offer. I used this a few months ago to dispute flight tickets for Jet Airways when they cancelled all their flights. I managed to get a full refund on my card. People who did not reach out to their credit card companies (if they purchased on one) are still awaiting a refund, which might never come due to the closure of Jet Airways. This would have not been easy to resolve if I had paid for the same tickets using a debit card or cash. Similarly, if your credit card got skimmed or stolen and someone would use it illegally, the fraud protection would work for you.
Of course, like using all financial products, discipline is most important. The minute you default on your credit card bill the friend turns into a foe. The key rule of using a credit card is to ensure you pay the full amount before the payment due date. Paying the minimum amount due only avoids the late fee. Finance charges levied in the form of interest on the outstanding amount are very high and can range between 30% to 42% per annum.
Another thing to bear in mind is that credit cards charge interest when used to withdraw cash. A credit card is not equivalent to your debit card where money gets removed from your bank account, instead, it is a loan you take from the bank.
Therefore, credit cards are bad is not true. How you use a credit card determines whether it is your friend or a foe.
Shipra Baranwal works in the lifestyle management industry. She’s also an expert at leveraging her credit card rewards and together with her husband she earns more than a million miles each year. Shipra writes about travel loyalty and credit card rewards on www.livefromalounge.com and runs the PointsPurse workshops to encourage women to start using credit cards.