Credit card is certainly a fancy thing to keep with you. It lets you buy whatever you want and whenever you want. Importantly, you do not need to have cash with you. Plus, you can repay the swiped money in monthly installments (EMI) at affordable interest rates. Not to forget, most of the credit cards are also FREE to use, meaning there’s no annual fees. Another aspect is that you earn points for your spending and you can redeem them for cash or vouchers. So, no wonder, a credit card is most sought after globally. But, the big question is, in spite of the above plus points, is it worth to apply for a credit card with no annual fees and reap the benefit?
Credit card is a liability, not an asset
One of the important things that you need to realise, in spite of all the (dis)advantages that you may find above, is, credit card is a liability. In simple words, it is a loan that you are taking from the credit card company. So, they give you a loan and you take the money from them, use it, and then repay. While this sounds simple, there are certain problems that you may end up with. Let’s see the top 5 problems or rather the most common ones that I’ve seen –
- Excessive spending – This is by far the most common problem that I find. The reason for swiping can be many, however, what’s important is, you need to stop swiping your card for every second reason. BTW, did you know that ideally, you should never swipe more than 30% of your credit card limit? Supposedly if your credit card limit is Rs. 1 lakh, you should only swipe up to 30,000 rupees at any point of time. Doing this will ensure you are not credit hungry and subsequently your CIBIL credit score will not get affected
- Non-repayment of credit card bill – Again, one of the major reasons why credit card becomes a pain in the wrong place. You know why? Because every time you don’t pay your monthly due amount, you are charged exorbitant interest rates along with your next payment. This is ridiculous as you end up paying so much more money. Also, the exorbitant rates apply when you only clear the minimum due amount. If you are unable to repay your credit card dues before the due date, think twice before swiping your card.
- Have multiple credit cards – When you realise that credit cards are an easy way to purchase things that you want, most of them tend to apply for many credit cards. While the thought of “budget free” spend is good, you may also want to think about the payment crunch that may arise. Unless and until you stick to the “Spend 30 % of credit limit” rule as stated above, you are bound to get in to trouble with your payments sooner or later. So, keep 1 credit card and use it whenever you want; doing this this will at least help you in getting a higher credit limit and better credibility.
- Unauthorised transactions – From the time your credit card gets activated and you start to use it, make sure you keep it safe and only with you. If you lose your credit card and someone uses it, you may have to end up paying the bill unless and until you report to your credit card company at the earliest. Unauthorised transactions are not always covered by credit card companies. So, make sure you use your credit card at safe and trusted places. Never share your credit card details to unknown people for whatever reason.
- Collecting points for cashback – This is yet another phenomenon that I have observed in most of them. Do not swipe your cards just to collect those points because the amount of money that you’d have spent, is worth a lot more than those points. I know a friend who spent close to Rs.4 lakh in a year only to get himself cash back worth Rs.10,000. A lot of credit card companies also waive the annual fees if you collect certain number of points / make certain amount worth transactions. Either way, on a long run, it isn’t worth your money.
So, here’s the summary – Apply for a credit card only if you are in need of buying something important and if you do not have the cash with you. Do not swipe your credit card for purchasing luxury items or unwanted shopping. Do not get in to the attitude of collecting a lot of points just for a meagre cashback or annual fees waiver. Do not spend more than 30 % of your credit limit. Swipe your card for the amount that you can afford to repay next month. Always pay off your credit card in full and avoid converting it into EMIs.
I hope you will follow the above, as I have personally seen hundreds of my friends and family members getting in to the trap. In fact, I have also been a victim of this and today, I have learnt it the hard way. Stay wise with your money and take decisions that will save you money. Remember, what you have is always yours and will be with you. If you have enough money with you to spend on things that you want, use your debit card or cash. Do not fuel your credit cards for momentary happiness. You will thank me later. Stay wise 🙂