How to make your credit card work for you

A credit card can be a smart tool to manage your finances. Use it responsibly to make the most of it

article source: LIveMint – June 06, 2016


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The favourite whipping boy for any problems that ails personal finance is the credit card. You blame it for your lack of savings, your lack of discipline in spending and anything else you can pile on it. While it may be the snake in most personal finance paradises, there are compelling reasons to include them in your financial tool kit to help you manage your personal finances.

However, for credit cards to work to your advantage, it is necessary that you develop the habit to use credit cards responsibly. This includes developing the discipline on how much to spend, what to spend on and make payments on the card when they are due. And the most important thing is to remember that the credit card may stand in for cash, but it cannot stand in for your income.

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For convenience

The ease of making payments without having to carry a lot of cash around is the biggest advantage of holding a credit card. “A credit card can be of great convenience as it allows you to move around without carrying cash,” said Ranjit Punja, chief executive officer and co-founder, CreditMantri Finserve Pvt. Ltd, an online loan service provider. Not having enough cash on hand need not stop you from buying something you want. This is of course comes with the caveat that your budget allows you to buy it. “Spend within your means, use credit card for essential purchases, rather than borrow money,” said Punja.

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Remember, that ubiquitous bag of money held tightly under the arm when there was a big-ticket purchase on hand, or the sheaf of travellers’ cheques on a trip abroad? Well, a credit card makes paying for big-ticket purchases convenient and even safe. You need to take care of just the credit card instead of wads of cash. Even if you were to lose your card, blocking its use is just a phone call away. If in the meantime the card was used, credit card companies generally have facilities to protect the card holder. (Read here to know what to do if you lose your credit card:http://mintne.ws/1UgPGw7). You can sign up for optional security features that your credit card may provide. See if it offers you the facility where you get alerts if there is any sort of unusual activity on the card.

To manage cash flows

You are prudent in your spending and live within your budget. But there may be times when the cash on hand may be inadequate to meet a planned expense just because there is a mismatch in cash flows. The inflow of income may not be on time to meet an essential outflow on account of expenses and obligations, say utility bills or insurance premiums or even some loan repayments. You can use the credit card to bridge this gap and make sure that the income earmarked in the budget for these expenses go towards paying off the credit card balance.

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“When you pay the minimum amount due on your credit card bill, are charged an interest of 36% per annum to 48% per annum for the balance outstanding amount. So, pay off the maximum that you can pay, and not just the minimum amount,” said Adhil Shetty, chief executive officer, BankBazaar.com, an online loan service provider.

Use the no interest period between when you use the card and when the payment is due to manage cash flow issues. You can even actually earn some returns on the income in the time between when income is received and when you have to pay off the credit card dues.

Building credit profile

The way you use your credit card can demonstrate responsible and disciplined credit behaviour that can go a long way in building your credit profile and credit score. “Make sure that there is no delay in paying the balance outstanding, and pay it off in full every time,” said Punja. Other behaviours that are noted include the extent to which the available credit limit is used, the number of credit cards held and the frequency of seeking credit accommodations. “Keep your utilisation up to 40-50% of the credit limit,” said Punja. “If you exhaust the entire credit limit, it shows that you are credit hungry and it can adversely impact your credit profile,” he added.

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Keeping all the parameters low will score high in your credit evaluation. Good credit behaviour that is sustained over a period of time will have a positive impact on your credit profile and credit score.

In emergencies

In an emergency, you can use the credit card to meet expenses even if they are unplanned and unbudgeted. For instance, if there is a health emergency there may be a need to make immediate payments to start the required treatment. In such a situation, a credit card can eliminate the delay in arranging funds from other sources. If you are able to pay the amount on the due date then you will not even have incurred any interest cost. This is unlike a loan on which interest will begin accruing as soon as you use it. In a crunch situation you can also withdraw cash up to the specified limit on the card, though there is a cost associated with it from the time of withdrawal.

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“The credit card is not a debit card that you can use to withdraw cash from the nearby ATM. Cash withdrawals are charged high interest rates right from day one. There may also be associated fees for cash withdrawals,” said Shetty. Now, this does not mean you treat your credit card as your emergency fund. For one, you need own funds to meet emergencies not credit with which there is likely to be a cost associated. Second, the extent to which the credit card can be used to meet emergencies is limited to the credit limit available that is unused.

Operational efficiencies

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Using the credit card for all your expenses makes it easy to track them. Your card statement will list all the charges and it can be used to check against your budget.

If a product purchased has to be returned or exchanged, then a credit card payment makes it easier for the establishment to verify the purchase. There are reward points that accumulate on credit cards based on usage that can be redeemed in multiple ways.

As far as possible, use the rewards to pay off the outstanding balances rather than to buy things you may not really need and even end up in paying extra over and above the rewards available.

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If you have to make the best use of the credit cards, then it is important to select the right card that meets your specific needs and compliments your budget. (Read here on choosing the right credit card: http://mintne.ws/1G72M9f). Focus on the costs and charges associated with the credit card, its access to shops and establishments that you are likely to use, and credit limits offered.

Understand how credit cards work and know the terms on which the credit card was issued to you. Automate the payment on credit cards so that you meet your obligations on time, and develop the discipline to keep the credit card usage to what is essential and planned.

Credit cards can be a smart tool if used the right way. But do remember that irresponsible use of a credit card can damage your current as well as future financial health. It is important to have the discipline to use the card within the credit limit, and pay back the dues in time.

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