There are several financial tools which have made our lives more convenient than ever. Credit Card is one such tool which besides convenience has several other advantages to offer. But like everything else existing in this world, materialistic or non-materialistic- the credit card also has its own set of pros and cons. This article will give you a proper insight into how you should use a Credit Card wisely and what all mistakes while using this financial tool need to be avoided.
What will we Explore?
- What is a Credit Card?
- What are the Advantages of Using a Credit Card?
- What are the Risks attached to Using this Financial tool?
- How to use a Credit Card Wisely?
What is a Credit Card?
A financial tool to make purchases or online transactions. It allows the user to borrow funds from a pre-approved limit to pay for his/her purchases. The financial institution issuing the card is the one who decides the limit based on the credit score and history of the user. Greater the credit score and better the history, higher is the limit granted by the institution. So technically when the user swipes a credit card to process a transaction, money gets deducted from the pre-approved limit.
What are the Advantages of Using a Credit Card?
Besides providing the convenience of cashless transactions there are several other advantages of using a Credit Card. If this tool is used wisely it proves to be more beneficial in the long run. Let’s understand how.
- A Global Financial Tool: Being a global financial tool a credit card can make your shopping experience hassle-free. You need not worry about currency conversions.
- Increases Purchasing Power: Credit Card empowers you to purchase something instantly and pay for it later and the amount adds up as your credit card balance. There are some financial institutions which also offer a grace period where the user need not pay any interest charges.
- Entitlement to Credit Card Rewards: Depending on the spending pattern, the user gets rewards which can be redeemed as discounts, vouchers and even cashback. As per experts frequent travellers making purchases via credit card can win reward points which when redeemed are sufficient enough to finance a complete vacation.
- Fraud Protection: You need not worry if you lose your credit card even if it lands into wrong hands. You are just supposed to notify your credit card issuer before a fraudulent charge is made.
- Increases your Credit Score: Payment of credit balance before the end of the billing cycle gives you an increased CIBIL score. The increased score, in turn, can increase the limit of the pre-approved fund in future.
What are the Risks attached to using this Financial Tool?
If the card is not used wisely you may end yourself in debt. Let’s understand how.
- Higher Interest Rate on Untimely payment: If the credit card payments are not made before the due date the user lands up paying a higher rate of interest on the borrowed credit.
- Shopping Eases, Spending increases: The easy availability of credit can in some cases lead to overspending creating a financial mess. Experts advise users to keep the credit utilization ratio below 50%. By doing this you can safeguard your credit score and profile.
How to Use a Credit Card Wisely?
A responsible credit card user must keep the following things in mind.
- To control the urge of Overspending: Studies show that the pre-approved fund available, tempts the user to make unnecessary purchases. This temptation might take a toll over the credit score if the user is unable to pay off the credit balance before the end of the billing cycle.
- Paying off the Credit Card Balance in Full: On-time payment of the balance can help you avoid paying the high rates of interest which are charged on the due amount. If the user is unable to pay off the amount in full then the remaining balance is subjected to interest. So it is advised that the balance is paid off in full before the end of the grace period.
- Know when to stop: You should stop using your credit card if you feel that you won’t be able to pay off the credit card balance in full else you will land yourself in debt. Paying higher rates of interest can be very stressful. To avoid such circumstances the user should use not more than 50% of the pre-approved credit limit.
- Keep Credit Score in Mind: If you are not taking care of the above-mentioned points you might ruin your credit score. Do not miss a payment for more than 30 days. Minimize the use of credit cards to avoid this situation.
- Understanding the Credit Card Terms: Do not hesitate to contact your credit case customer care providers in case of any misunderstanding. The terms of the Credit Card might be confusing. A single credit card can have different rates of interest in different usage conditions. Not understanding the terms might lead to increasing your credit card balance unnecessarily.
- Avoid the Risk of Credit Card Fraud: Everything which carries your personal information carries the risk of privacy breach and fraud. Following the instructions and reporting on time in case of credit card loss or theft can prevent you from this risk.
- Make Online Purchases: On making online purchases using a credit card the user can avail more rewards.
- Redeem Award Points: The user should learn to use the credit card properly and redeem the reward points in exchange of ticket bookings, hotel bookings and even cashback.
To cultivate better credit card habits, one needs to understand the above-mentioned advantages, risks and tips associated with it. There have been incidents when users have become bankrupt because of using this alluring financial tool irresponsibly and insensibly.