I am a 23-year-old moving to Mumbai for my first job. Since my starting salary isn’t very substantial, it has got me wondering about my financial situation. And, as I don’t want to borrow money from my parents, I am looking for an option that can serve as backup during emergencies and even support with day-to-day spends.
Does this scenario sound familiar? I am sure it rings true with a lot of us.
In such situations, there is one handy tool we all can turn to – credit cards. So, what exactly is a credit card? Simply put, it is a financial agreement between an individual and a lender which allows the former to borrow funds immediately against the promise of repaying it at a future date. The lender additionally agrees to a repayment timeline and charges interest against overdue payments, if any.
The fact that credit cards allow you to borrow money instantly and almost anywhere, give them certain indispensable advantages which can be the key to ensuring your financial freedom. Let’s review some of these features:
- Extended spending capacity – As long as you can pay back what you borrow from your lender, you can use your credit card to bridge the small gaps between your income and expenses. What’s great about credit cards is the interest-free period (usually 40-50 days) that you get to enjoy. Further, repayment schedules are largely flexible and you can make minimum monthly payments instead of having to return the money in lump sum. Additionally, you get the option of converting big-ticket expenses made using your credit card into EMIs, giving you much needed time to pay off your debt with minimal interest payouts.
- Fuel discounts and frequent flyer miles – Depending on how you travel and what you spend on the most, credit cards can be a boon. However, choosing the right credit card is the key, you can earn – frequent flyer miles, discounts on fuel as well as various freebies with respect to dining, shopping, and more. Points earned by making purchases using the card can also be redeemed for additional freebies such as discount vouchers, free fuel refills or flight tickets. However, every such credit card has its own point structure so you need to review the offer document carefully before signing up. [Also read: How to Choose between Cash Back and Rewards Points on Credit Cards].
- Financial record maintenance – One of the biggest advantages of transacting with a credit card is that you will always have a very definite record of each and every one of your purchase and expenditure. This makes it significantly easier to keep track of your finances and plan your monthly budget.
- Credit health – Although credit ratings are relatively new in India as compared to some other parts of the world, the trend is slowly picking up. Lenders depend on credit health information recorded by CIBIL, Experian and other credit bureaus when making lending decision for future loans and credit cards. In such cases, applicants who have a positive history, highlighting their credit-worthiness, are given preference. Therefore, a credit card can help you build your credit score for the future.
- (Forced) Financial Discipline – Many of us need a bit of help with managing our finances especially during the initial years. Credit cards however can teach you a lot about financial responsibility and discipline. While using a credit card you are likely to learn about how to maintain a repayment schedule, calculate interest rates and most importantly, how to optimally manage your income and expenditures.
- Enhanced convenience – Just swipe the card at any touch point and sign on the receipt. That is all you need to do to complete a successful transaction as long as you haven’t exceeded your credit limit. Moreover, credit cards also make online shopping much easier with many leading electronic retailers offering big discounts against purchases paid for using a card.
- Increased security – Other than the usual electronic encryption, credit cards have multiple layers of security built into them. From two-step verification to one-time password-protected gateways, credit cards are one of the most secure transaction instruments around. If you lose your card or misplace your wallet, you just need to call your credit card company and they’ll block the card and issue a new one. You are even protected if someone uses your credit card for any unscrupulous activities.
Although most people view credit cards to be a form of financial liability, it is not necessarily true. If you use a credit card (any personal finance for that matter) wisely, they can be an asset rather than a liability. However, unwise spending decisions and misplaced sense of one’s finances can lead to future financial problems. To sum up, if you are prudent and level-headed about your finances, a credit card is the perfect asset to guarantee financial freedom for the present and the future.