If used judiciously, credit cards offer an excellent opportunity to manage finance by using the interest-free credit period. However, if such cards are used extensively to buy things way above the earnings limits causing delay in paying the credit card bills, users may fall in a debt trap.
“Credit cards were once considered a luxury, but it’s now a necessity, because credit cards are what help you address your emergencies, needs as well as lifestyle upgradation, especially for young earners who have just started their career and earn a modest income,” said Anil Pinapala, CEO & Founder of Vivifi India Finance.
“Most of us have been brought up fearing credit cards because they are often considered a means to accumulate debt. But not all debt is bad, especially if it takes care of your needs and helps you build your credit profile. Responsible use of credit in fact, is a critical financial learning for efficient management of your personal finances. It inculcates a habit of balancing your income and spending well, thereby enabling access to more credit as you settle in your career,” he added.
Responsible use of credit cards also helps the users in improving their credit scores.
“Moreover, a strong credit score is what will get you the best rates and services when you apply for a bank loan. Also, not to forget, discounts, cash-backs, vouchers and other offers can all be availed through credit cards, from time to time,” said Pinapala.
However, for new earners, in the absence of existing credit scores, it may be difficult to get a credit card with good features. To fill the void, fintech players like providers of BNPL (buy now pay later), personal line of credit, etc chip in.
“Unfortunately, new earners in India are either underserved or unserved by the traditional banking system, as they have no credit history. The tin file consumers have no access to credit cards and this is exactly where players like FlexPay stepped in to provide credit to unbanked consumers. Flexpay’s personal line of credit especially benefits the new to credit or the young earners as it ensures that they have access to credit as and when they require,” said Pinapala.
Talking on the importance of credit cards, Nitin Mathur, CEO, Tavaga Advisory Services said, “Millennials these days eagerly wait to have their own credit cards so that they can spend whenever and however they wish. As soon as one starts working, they become eligible to apply for a credit card. However, a credit card is the root cause of a lot of financial troubles and often make new earners prone to accumulating debt more than they can afford very early in their life. Thus, credit cards should always be used with caution to manage finances and save money.”
Mathur lists the ways in which credit cards help to improve personal finances:
Improve Credit Score
Using a credit card is similar to taking out loans as credit bureaus consider all credit card transactions when computing your credit score. While interest is charged on loans, credit cards do not charge interest as long as the full payment is repaid before the due date. Timely repayment of all credit card dues improves one’s credit score which further helps to build credibility for future borrowing.
Card Benefits for saving Money
Many products provide benefits tied to credit card payments that you wouldn’t obtain otherwise. Discounts, rebates, coupons, and other special deals are among them. One should however be very careful when availing these benefits as they may be a trap to take on credit card debt more than you can afford to pay back.
Credit card EMI’s – a smart way to pay back
Credit card issuers form partnerships with manufacturers, service providers, and merchants to offer EMIs on their products or services at a reduced or No-cost. Some merchant partnerships even provide credit card holders additional discounts and cashback when they use the no-cost EMI option on certain services and items. While new earners can avail this option to spread out the payments, it should not lead to too much spending on non essential items.
“Even though credit cards help you manage your cash and avail attractive deals, it is a debt after all which needs to be repaid back. Any delay in payments will attract a huge penalty and affect your credit score too. It is thus advisable to spend from your savings and use credit card only if it is absolutely necessary and also within your means,” said Mathur.