Credit cards, if used wisely, are one of the most useful financial tools in the world. They are no longer a product aimed for the elite class, in fact, for the salaried or the urban class, it has become a way of life. As of March 2020, the number of credit card users stood at around 57.5 million. This presents a phenomenal opportunity for Banks to expand their user base. Credit card users as the percentage of total population is only around 4.3%.
The link below provides Bank wise Credit Card statistics as released by RBI.
Many Banks provide the salaried class with a plethora of credit cards. Each card with different features, eligibility and benefits. Of course, the credit score (managed through CIBIL) plays an important role in the issuance of cards. Credit Card is an unsecured form of lending. So, Banks want to make sure that they don’t issue cards to people with a history of default.
Credit cards reward only those users who use it smartly and have great financial discipline. The probability of going astray is high. Below are some of the smart ways to get maximum benefits out of credit cards:
Users need to be mindful of the various fees that accompany the cards. For most cards, banks often charge joining and renewal fees. In some cases, cards get issued with no joining fee but renewal fee gets charged upon the expiry of one year of issuance. However, in most cases, the renewal gets tagged to the annual spends. So, the user needs to apply for cards upon careful consideration of the fees and the waiver related conditions.
Credit limit and CIBIL score
Credit limit in a card represents the maximum amount that can be spent on a credit card. This is different from the cash limit. Cash limit represents the maximum cash that can be withdrawn. It is often included as part of the credit limit. The credit limit is different for each individual as it is a function of income, credit score etc., At the time of applying for the card, one should insist for a higher credit limit as it would aid in improving credit score (if paid in full and on time). A lower utilisation percentage (card usage upon credit limit) improves the credit score and vice-versa.
Many cards come with a host of rewards in the form of gift vouchers, free access to airport lounges etc., The user of a credit card should understand three things.
- The way the reward points are being calculated (number of rewards points for spends, higher the percentage more the benefit)
- The expiration of reward points
- The cost of reward points, if redeemed through various modes.
All things being equal, one should use a card that allows them to carry over their points with no expiry (evergreen). Also, should have the option to redeem them as cash. Nothing beats cash redemption as it would also save people from redeeming products for the heck of redeeming the points.
Review the card statement
It is prudent to carefully review the statement on a periodic basis so as to ensure the accuracy of the transactions. Itemised statements would provide the charges, if any levied by the banks. It is imperative for the user to understand the various charges before paying them off. Also, it would provide details of reward points, likely to expire in the next 30 to 60 days.
In order to get the maximum benefit from the usage of credit card, the dues are to be paid in full . The habit of paying the minimum due alone is a risky proposition, the interest and penalty charges for non payment of dues in full is very high and this could push the user to the habit of poor personal financial discipline and into a vicious cycle of debt. One can even enable an auto-payment option to avoid paying it late or inculcate the habit of paying all cards on a specific day each month (irrespective of paying early by a week or two).
Owning multiple credit cards
Whilst using a handful of credit cards (there is no ideal number but anywhere around 2-4 is good enough) is one of the great ways of managing money, one should not end up owning too many, it could turn out to be disaster. Safeguarding and tracking details like CVV, expiry, PIN and controlling spends across various cards could be cumbersome if one ends up with too many cards.
Except in the case of an emergency, one should always avoid using cards in an ATM for withdrawing cash. The charges levied for cash transactions are usually very high and one may even think of using the cards for loans as it could be comparatively cheaper.
Like any financial tool, credit cards if used wisely and carefully have numerous benefits and in fact, are slightly better than debit cards.