Credit cards de-demonised: Why you should use them

Credit cards. Those guys from the bank call all the time pestering you to take one. But you don’t trust them of course.

You wonder what charges they will add to it. And your parents have never used credit cards. Any kind of debts are bad… and the credit card is the worst of them! You’ve heard enough stories.

As someone who has used credit cards for years, I will in this post attempt to demystify and de-demonise credit cards for you. If you have never used a credit card, read on to understand how credit cards work and how you can use them to your advantage without the risk of losing a single rupee.

Yes, they could be potentially dangerous and have the ability to invade your state of mental peace. But they could also give tonnes of freebies and luxury experiences without you having to spend a rupee. Also, they help you save money in the form of bank interest!

Pepper. Used correctly and in appropriate amount, it can add great flavour to your meal. But used in excess, it ruins the dish (and burns your mouth).  That is exactly how one needs to use a credit card. Use judiciously and you get a host of benefits. But use recklessly, and you get into trouble.

Credit card companies want you to be reckless. They want you to spend more than you can afford because that is their business model and that’s how they make money. But you know better. The idea is not to let the credit card company take advantage of your situation but do it the other way round.

Believe me, it is possible. All you need is a bit of self-control and always meeting the credit card bill deadline. Take it from someone who has used credit cards for years and years and never paid a single rupee in interest but has only taken advantage of the amazing offers and rewards that come with these cards.

Read on.

WHAT IS A CREDIT CARD?

Unlike a debit card, when you pay with a credit card, money from your account is not debited. Instead, the bank lends you money for your everyday requirements at zero interest for up to 45 days. If you spend 100, you need to pay back the 100 by the end of the 45-day cycle to avoid paying interest.

HOW DOES A CREDIT CARD WORK?

Credit cards run on 45-day cycles. Here is how:

DAY 1: Cycle begins
Spendings on your credit card from this day till Day 29 will reflect on the next bill that is generated on Day 30. Let’s say you cycle begins on the first day of the month. If that month is June, your cycle begins on June 1. And all spendings on your card from June 1 to June 29 will be reflected in your bill that is generated on June 30 (unless there are pending payments from the previous cycle. WE DON’T WANT THAT.).

DAY 30: Bill day
This is the day your bill is generated and either emailed or sent by post/courier service to you. This is June 30 considering Day 1 was June 1. The next payment cycle begins from the following day, July 1 in this case.

DAY 45: Deadline
This is the most crucial day of your cycle. You must pay the ENTIRE AMOUNT IN YOUR BILL by this date. This date will be July 15 considering Day 1 was June 1.

WHEN SHOULD YOU USE A CREDIT CARD?

Considering you have the entire amount you spend on your credit card in your bank account and you are able to pay the entire bill amount before the last payment date, use it every time you have the option. From buying bread to a washing machine, if you have a credit card, use it for all your everyday online and offline transactions.

WHAT NOT TO DO WITH A CREDIT CARD?

1. Never spend more than the amount you would have in your account on payment date: The most important thing to remember is that the credit card is not an extension of your income. Your card limits might be INR100,000 or much more. But if you have INR50,000 in your account, you must have the self control to not spend more than that. Use a credit card like a debit card. The only difference is, in that case of debit cards, the amount is immediately deducted from your account while with credit cards, you need to pay by the end of your 45-day cycle.
2. Never use a credit card at the ATM to withdraw cash: When you withdraw cash, the 45-day cycle stops working and interest on the withdrawn amount starts piling from the moment the money comes out of the machine.
3. Do not fall into the Minimum payable amount/EMI trap: When you spend a relatively large amount on your credit card, you are likely to get a call from the company asking if you would like to pay the amount in easy monthly instalments (EMIs). Remember, EMIs are not interest-free and our point is to make use of credit card benefits and not pay interest to the card company! Also, there is a “minimum payable amount” mentioned on the credit card bill. Ignore that because the amount beyond the minimum payable limit will be levied interest on. ALWAYS PAY THE ENTIRE BILL AMOUNT BEFORE THE PAYMENT DATE.

HOW DOES A CREDIT CARD BENEFIT YOU?

1. Earning in interest: This is considering you have the entire amount in your bank account but are using your credit card instead a debit card to make a payment. Say you have Rs100,000 in your bank account. On Day 1 of your 45-day card cycle, you make a payment of Rs100,000 with your credit card and you pay the bill as usual at the end of 45 days. Consequently, you earn the bank interest on Rs 100,000 for 45 days.
2. Reward points: You earn reward points when you make payments with your credit card. It could be anywhere between 2 to 8 for every Rs 150 spent depending on the card. Using the cards on specific portals and during offers could earn you more points. You can use these points to buy different kinds of products. I mostly use them to book flights and hotels. Credit cards can bring your travel costs down.
3. Discounts: Online shopping sites frequently offer discounts for users of certain credit cards. You can avail those when you shop.
4. Travel in style and comfort: Certain credit cards give you membership to clubs that give you free access to airport lounges, which otherwise would cost you thousands for a couple of hours’ visit. Along with comfortable couches at these lounges, what you get is a great selection of tasty food apart from wines and alcoholic beverages and all for this without spending anything… just because you own a certain credit card. [Watch below: My first airport lounge experience. I’d got access to the lounge for free as part of my credit card privileges]
   

WHAT ARE THE ANNUAL CHARGES OF USING CREDIT CARDS?

Initially, most banks will tell you there is an annual charge for using a certain credit card. But it is easy enough to have them waive it for you. Some banks offer to waive of the charges if you spent a small amount of money in a certain number of months. Others will say, you need to pay a certain amount, but the bank will give you back the amount in the form of vouchers.

If you are a first-time credit card user, go to the bank you already have an account in and ask for the credit card. This bank has has a relationship with you for a while and it is easier to convince them to give you the best deal.

I have never paid annual charges for using a credit card. When I applied for my first card several years ago, the bank said I needed to spend INR15000 in three months to have my annual charge waived. I spent the amount and didn’t have to pay anything. My later cards were all free. With every bank trying to give you credit cards, it is easy for customers to negotiate with banks.

A random telemarketer had not convinced me to take my first credit card. I had researched and understood how they work myself, called up my bank and told them I wanted a credit card. They gave me an entry-level card with a small limit. Over the years, the bank upgraded my card(s) and now I use premium cards where I can earn more points while spending less. These cards have saved me lakhs over the years in terms of flights and hotel bookings. And like I mentioned earlier, I have never paid a single rupee in interest.

If I can, so can you.