Credit Cards aren’t that Evil

Talking about using (or not using) credit cards is a controversial topic in itself.

But I will not paint everything about credit cards with the same brush that many people use, i.e. credit cards are evil.

Though I am in agreement with the advice of staying out of credit card debt, I won’t go so far as to say that you should cut up all your credit cards and throw them away! 🙂

But, credit cards aren’t evil.

Credit cards can actually be beneficial and smoothen out your life if you use them sensibly. But be reckless with these cards and they will get you into a big financial mess.

I am sure most readers here know how credit cards work.

But at times I see big credit card spenders who actually don’t understand how a credit card works! Result? They end up treating it like a second source of income!

They use it like they don’t have to pay it back! 🙂

They keep digging their own financial grave of debt and then…. one day wake up and realize what they have got themselves into.

Credit cards don’t increase the purchasing power. They in effect, bring future purchasing power into the present. A credit is a credit. Which means that what is bought today on credit has to be paid back tomorrow…with interest. Plain and simple.

This is what needs to be realized by credit card users.

Unfortunately, many people don’t realize it.

For many, using credit cards is a bit of a status symbol. Gold, Silver, Platinum – that’s how credit card companies attach a psychological value to these cards 🙂 and can easily lure you into using them more than what is actually necessary.

But, it can be useful if you know how to make it useful.

Let’s talk about the positives. We can delve into the negatives about credit cards later or better still, you can easily find about it on google.

Credit Cards aren’t Bad!

Why and how?

You already know its convenient, smooth, etc., etc. and some more etcetera…

Let’s rather take some situations where these credit cards can actually turn out to be very helpful:

• Someone in your family gets hospitalized and they don’t have health insurance (Oh No!). Or they have a health cover which says pay-first-reimburse-later. And you being the person-in-charge of the situation need to pay up some money. What would you do if you do not have the money needed? What if it’s a month end and you are yet to get your salary? Asking friends and family is fine. But a credit card can help you instantly. It can help you in such emergency situations. (At times, the money people have in emergency funds can also fall short. Credit card can really come to aid at such times)

This can be one really big reason why you should consider having a credit card. More so if you know you do not have access to instant liquidity to take care of emergencies.

Proper utilization of credit cards can also help people build their credit scores (CIBIL score).

And having a good credit score can be very useful if you know that you will be taking various loans in future. People having a good credit score get loans at cheaper rates when compared to those with a poor score. In simple words, a good credit score tells lenders that the borrower has a good repayment history and will not default on his or her loans. The opposite is true for poor credit scores.

Many people have no idea that their erratic loan repayments in past, missing due dates, applying for multiple loans in a short period of time, etc. are considered to be bad from credit behaviour perspective and can result in not-so-great credit scores. The result is that when they apply for their next loan, it might be rejected due to poor credit record. It is still possible to get unsecured loans like personal loans for low cibil score people. But generally, the rates on offer will be higher than regular rates.

There can be many other situations, though not as critical where credit cards can come in handy – like paying for unexpected car repairs, urgent purchases that cannot wait, etc.

Take another example – suppose you love to travel (like me) and are saving to fund a foreign trip after 6 months. You suddenly find that really mouth-watering ticket deals are available for early buyers. Though you don’t have enough savings to buy the ticket, you may as well bridge the fund gap using credit cards. Ofcourse, you need to watch out that what you are saving via the deal should justify this approach.

In any case, paying huge interest on credit cards is not advisable – which you may have to if you are unable to pay all the ticket payment dues before the due date.

Then there are other perks like reward points, etc. But these factors do not justify the unnecessary use of credit cards. But I know some really smart people who know so many credit card hacks that its just mind-boggling! These friends of mine are able to combine their credit card usage with air-mile accumulations and what not. Do a search of credit card hack stories and you will understand.

Then there is this mathematical reason for those who want to get into the nitty gritty of credit card maths: Suppose you need to make a purchase of Rs 30,000. You have this much money in your bank account and need this product and can afford it. But instead of paying in cash, if you make the payment by credit card, you can keep earning interest on that money that remains unused in the bank account. Once your credit card payment is due, you can use the money to pay for it. This is too much of a hassle for someone like me and the interest advantage is not very big. But yes, many people do it.

I would love to share some tips about good credit card usage. But I don’t use credit cards much so don’t expect any earth-shattering advice from me.

Nevertheless, here are a few best practices to consider:

• Ensure you pay your full dues (and not just minimum amount due) before due date. This way, you won’t have to pay any exorbitant interest.
• Please try (and I mean really try) not to spend money using credit card that you cannot pay back comfortably before the next due date.
• If you have to pick a card, chose one that charges least interest rate (just in case you end up paying interest), has zero or very low renewal charges.
• Also, if you know there are some cards suited for your lifestyle expenses, then you can pick those ones…assuming the above factors (least interest % and low renewal charges) are in place.
• Do not try to fully utilize your credit card limit. If you do, nobody else but you will have to repay the full amount utilized. That too with an additional big interest component.

Google search for more credit card tips. Tons of articles are already available.

Simple Things to Know about Your Credit Card (if you don’t)

In general, credit cards have a very high rate of interest. It can go up to 30-40% per annum!

If you pay your bills in full and on time (before due date), you will do just fine. The interest rates would not be applicable.

Most credit cards offer an interest-free period. The actual number of these interest-free days you get will depend on when the purchase is made and what is the billing cycle. So to take a simple example:

• Suppose you make a purchase of Rs 10,000 on 5th January.
• Your credit card bill gets generated on 20th January with a due date of 5th February.
• So you don’t have to pay interest, if you clear your full due to Rs 10,000 by 5th February.
• This way, you have got a 30-day interest free period for this particular transaction (5th January to 5th February)
• On the other hand…
• Suppose you make a purchase of 10k on 19th January.
• Your credit card bill gets generated on 20th January with a due date of 5th February.
• So you don’t have to pay interest, if you clear your full 10K by 5th February.
• This way, you have got a 16-day interest free period for this particular transaction (19th January to 5th February)

But…

If you do not make the full payment by the due date, the interest will start getting accrued. Also, if the bill is not paid in full in the previous cycle, the balance will be rolled over and from next cycle, the interest would be applicable instantly and you will not have an interest-free period.

I seriously suggest that if you use credit cards and don’t know about these things, please do find out how credit cards work. Learn how to read your credit card statement. Understand terms like payment due date, minimum amount due, total amount due, credit limits, account summaries, interest rates, etc.

It will really help you and also tell (some of) you why you are stuck in credit card bill cycle! 😉

But Credit Card isn’t the Problem

A knife can kill.

And the same knife can be useful in the kitchen.

Unrestricted and unnecessary use of credit cards is bad. But it’s the person doing it. The credit card is not asking you to go out and use it. 😉 Though credit card companies would love to see you do that.

As I said, a credit card doesn‘t increase your purchasing power. It only allows you to use your future purchasing power today itself.

And I totally agree that for most people, it’s very easy to misbehave and spend more money when using cards than when using actual cash. If you are operating in cash-only mode, then it does limit your purchases to the amount of actual cash you have.

But to be fair, credit cards are not for everyone.

If you fall in any of the following categories, you should avoid using credit cards altogether. You can even consider not having them at all:

• You are (for lack of better term) addicted to spending.
• You find yourself overspending every time you plan to pay by card.
• You are living paycheck to paycheck

Finally

Remember, treat the credit card as a convenience and not as a source of free cash.

If you will not buy something in cash (because you don’t have that much), make sure you don’t use your credit card to buy it just because it allows you to.

And please don’t feel that I am trying to say that you should not spend at all.

Cutting out from your life an extra coffee or eating out once-in-a-while will not make much of a difference. Your financial goals require proper planning and conscious investments separately.

All I am trying to say here is that don’t overspend and operate like you would do when using cash.

If you are disciplined enough with respect to your cashflows, go ahead and use your credit card. Ensure that you clear the bill in full before the due date.

But if you aren’t in control of yourself, please avoid using it. At most, keep it for emergencies and to manage temporary liquidity constraints.

And I am sure you know your behavioural patterns to understand which category you belong to. 😉

In the end, I am no one to advise anyone whether they should be using credit cards or not. It’s a personal choice. So think about it. Review how you have been using cards in the past. And whether you need to do something about it or not.

Related reading: How to choose the Best Credit Card in India?