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What Is A Credit Card?
A Credit Card is a financial instrument that is issued by a bank or a NBFC with a predefined limit, called the ‘credit limit’, that can be utilized to make cashless transactions at point-of-sale outlets, online transactions, or pay off debts on other cards.
Many people have faced bad experiences with credit cards, leading their users into debt traps. However, it is not the credit card, but the user’s own financial indiscipline that leads them to incur steep penalties and finance charges. If the user is wise and uses the card sensibly, credit cards can be a tool to build one’s own credit profile and can save money. A few simple steps can help anyone get out of a debt trap.
Let us take a look at how credit cards can help improve a person’s finances and how it can be used wisely.
How to build a strong credit score:
All transactions that are made through credit cards are similar to availing loans. Credit card issuers report these transactions to credit bureaus, which in turn use this information to calculate a user’s credit score. However, unlike with loans, credit card users do not incur interest charges on transactions as long as they repay the dues before the due date. The score dips at certain points only in cases of delays or late payments, and for each payment that is received on time, the credit score improves. This way, a user can make proper use of credit cards to build a good credit score.
Lenders consider a credit score of 750 and above as “good”. As a result, those with a higher credit score have a better chance of getting loans and credit cards approved quickly. Numerous lenders also offer preferential interest rates to aspirants with a high credit score.
One easy method of building credit is by using the credit card to pay the monthly internet bills, phone bills, or utility bills like water, electricity, etc. on time. These timely payments can help build a positive credit history and improve the cardholder’s CIBIL™ score. Since these frequently incurred and regular expenses tend to be much lower when compared to purchasing material goods, the debt they incur on the cardholder’s credit card can be paid off quickly or within a short span of time.
Flexible payments through EMIs:
Credit card issuers provide EMI facility to convert the entire bill amount that exceeds the defined threshold limit or a part of it into monthly installments depending on the repayment ability of the user. This option is beneficial for those people who are unable to repay their total credit card bill by the due date. It can also be helpful for those who are unable to make essential but expensive purchases because of a lack of an option to repay the amount in installments. The conversion to installments option is usually provided with a tenure of six to 60 months, which allows cardholders to choose their loan tenure as per their repayment capacity.
Credit card firms also collaborate with a number of sellers and merchants to provide cardholders EMI options with low or no interest on their services and products. The merchant or service provider bears the entire interest cost aspect of the EMI facility in the case of identical no-cost EMIs. The cardholders are simply required to repay the purchase price in easy monthly installments, as well as any applicable taxes, including the cost of the interest component of the installment.
Credit Card Reward Points:
Credit card issuers offer reward points, discounts, vouchers, cash back, etc., on certain transactions to attract and encourage the cardholder to use the card more often. There are a variety of cards available on offer, each with different benefits associated with it. Cardholders can make the most of these benefits by opting for cards with reward point structures and benefits that match their lifestyle and spending pattern the most. You can read more on how to get max. benefit out of credit card reward points.
Certain cards which offer reward points in return for purchases made with them also offer a waiver of annual fee by redeeming these points every year., thus making the card free of annual costs for the cardholder.
In addition to the reward points and cash back offers, many credit cards also offer multiple lifestyle benefits, such as free lounge access at domestic and international airports and complimentary club memberships to their users.
The above benefits are only a few ways in which credit cards can help users to boost their finances. Fiscal discipline is something that the user should develop to avoid getting into a debt trap.
Have a financially secure day!
