6 reasons why you should have a credit card

We all have different opinions about owning a credit cards based on our own perceptions. In this article I am listing out why it is beneficial to use a credit card instead of a debit or cash transactions.

1. You are rewarded to use a credit card

Almost all of the credit cards have a basic reward structure, that is, you get points when you spend. The points accrual and value of points vary card to card. For example, American Express cards generally earn you 2 reward points for every Rs. 100 spent, each point value at around 40ps. So if you happen to spend 1Lac in a year, you get 2000 points worth Rs. 800. In some high-end cards, spending  1Lac could even earn you points worth Rs 3300 excluding any bonus. Some cards offer you bonus rewards based on spend target completion or purchasing from a specific shop or websites. How you can redeem those points depends on card provider. You can generate shopping vouchers, buy flight tickets or even pay your credit card bills with those points.

2. Additional money in hand

Think of buying monthly stuff and still having money in hand for the whole month. You might think, you would anyway have to pay the amount a month later, what’s the point? But you will have to pay that “a month later”, that’s the point. With that extra money, you can do a lot of stuff. And to make most of it, why not invest in ultra-short funds or FDs or even if you let the money in your savings account, you still get the interest. Let’s see an example. Take 6% annual returns (or 0.5% a month) and 1L annual spend (or 8333 a month) on credit card for example. With extra 8333 in your account for a month, you earn a monthly interest of 0.5% that is Rs 41.6 a month or Rs 500 in a year. Which means an extra Rs 500 in your account.

3. No cost EMIs and other card based offers

Card providers generally tie up with stores and websites to provide no-cost EMIs. Again, even if you can pay the money upfront, you have option to pay only EMIs and use that money somewhere else. Besides, you would often see card based offers on store like chroma, central, shoppers’ stop or websites like flipkart and amazon, where you can get additional discounts on specific cards, that is, generally 5% – 10% of extra savings.

4. Build a good credit score

The biggest contribution to your credit-score could be a credit card. Though you still need a mix of secured and unsecured credits, for unsecured category, credit card helps your cause. A good credit limit, low utilization, timely payments and the age of card would give your credit score a good boost.

5. Emergency fund

We all have at least one friend who asks for money, says to repay in a couple of days, but doesn’t. But if you find yourself a situation where you need funds immediately for an ultra short duration, using a credit card could help. Had you been using a credit card, with extra money at hand you would less likely be in such a situation. But if you are, and you want to spend on something where a payment that can be done online, your credit card gives you minimum 15 and maximum 50 days of time to payback (depending upon billing cycle).

6. Last, but not the least reason is Security

It’s obviously more secure than cash, but even compared to debit card it provides more security. It is because of the basic difference in how debit and credit transactions work. Simply put, a debit card deducts money from your account immediately, while a credit card works on authorization basis, that is, it only authorizes the amount on your card, but actual settlement happens later. Which gives user a chance to point out a dispute before settlement happens, that is why card companies usually ask you to report any fraudulent transactions within 24 hours. But that’s not it. Because of a dispute possibility, card companies also want themselves to protect from any such liabilities. Thus, they often monitor transactions for any “unusual activities”, the algorithm may vary, but it generally takes into account place and mode of payment and amount. And if there is any alarming transaction, they will call you to ensure there is no misuse of card.

With so many benefits, there are still many people think otherwise of credit card. That is because of the mindset that card companies charge you bomb. It generally happens because a first time user often doesn’t understand the fine print. But if you could use a card wisely, it would only help you save extra. In the next article I will cover things you should know to avoid paying penalty and how to make most of your card.