There are 2 types of cards in the market debit cards and credit cards. Credit cards work on the concept of credit meaning spend now and pay later. But, we have often heard people maxing out their credit limits, unable to pay their credit card bill, and falling into a cycle of debt.
Hearing all of these things might scare you off. But credit cards when used strategically, can offer numerous financial benefits including Cashback, travel rewards, and lower interest rates. If you are disciplined in paying back your credit card bills on time, then you will attain a great credit score. This will make you eligible for the low interest rates given by the bank.
What are credit cards?
A credit card is a financial card issued by a bank or other financial institution registered by the RBI. It allows the users to spend money on a credit basis. They can borrow money from the bank for a short period of 45 days. If the money is paid back within this period then the bank does not levy any interest on this borrowed money.
Not everyone can spend the same amount of money with their credit card.
It depends on several factors:
- how much money you make per month,
- how much money you hold in your bank account
- Relationship with the bank
- Annual fee charged by the bank
- The category of the credit card.These are all common precautions by the banks to ensure that you have the financial capability to register for a credit card.
Saving money with credit cards
Now, this is the aspect that makes credit cards very attractive. Credit cards charge some fees from the merchants for completing the transaction and the credit card companies give a small cut of this fee back to its customers. This is given back in the form of Cashback points as a part of their reward programs. Some credit cards also offer free lounge access in the airports which normally would have cost nothing less than 2000 rupees for a single visit. Some cards also give points that can be converted to free flight tickets, some cards give free hotel stays, and some give free food coupons.
It depends on the type of credit card you have opted for. Carefully spending money on the credit card and paying it back diligently before the deadline the bank will help you avail all of these options without paying any interest on your spending.
Some low-value credit cards just give normal reward points. But on the other end, there are American Express black cards that give you access to yachts, private concerts, and much more in the luxury segment. Preferably a credit card should be free for a lifetime. Some cards charge an annual fee based on the premiums of the card. We must ensure that We can gain more benefit from the card than the annual fee being charged.
We can also take advantage of the low interest rates that bank provides to good customers who have high credit scores. The credit score can be built by paying off credit and bills on time and regularly. Due to these low interest rates on loans ‘, we can save lakhs of rupees every year on EMI.
Precautions to follow
Till now we have discussed only the advantages of using credit cards. But, we must also be aware of the problems with credit cards. If we are unable to pay the credit card bill, it will become a huge problem. Banks charge a huge interest rate of 30-45%. For comparison, a home loan would probably have an interest of 12% per annum. Hunt, we must be extra careful with these credit cards. Do not spend the money that you cannot pay in full do not try to take the EMI option because it is just destroying your free money and locking you in debt.
Also delaying payment will damage our credit score. Never make the mistake of maxing out your credit card. Always pay the amount before the bill is generated so that your credit score is not affected. Always try to cup your credit utilization under 30%.
Remember to spend the money only if -you have it in a bank account. In conclusion, we saw that credit cards may be scary due to the high interest rates. If used properly and intelligently can save a lot of money in the long term. Getting the knowledge of credit cards for this is extremely important.
We will discuss the best credit cards in each segment in future posts, so stay tuned!! Meanwhile also learn about budgeting hacks here
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