Parents and well-wishers often slip in a word of caution while discussing credit card expenses. Now that is primarily cause of the interest rate applicable on credit money. It is only natural to feel overwhelmed while shopping knowing that the purchase can be made immediately without parting with hard cash. However, planned usage of credit cards is a smart way to shop and save simultaneously.
Credit cards are often looked upon as the devil with horns. They entice you into carrying them everywhere. Credit card enables one to spend without actually having equivalent amount of cash in the account, at that point in time. It is such an alluring option that people are tempted into carrying multiple credit cards. Having said that a planned usage of credit cards is indeed beneficial.
Cash back Credit Cards
This basically means that when a bill is paid using a credit card, one is entitled to a discount. This discount is generally in the form of a percentage of the bill, sometimes capped and varies for different banks. Assuming 5% is the cash back on a certain credit card, while clearing the bill, discount can be availed and that 5% is credited to your account.
Cash back is a form of a reward scheme to encourage users to swipe their cards. The reward points system is another such scheme. Receiving cold, hard cash on a purchase is exactly what happens and it is difficult to find an equally attractive alternative. Cash back on swiping credit cards is provided on the bills of utilities, fuel, groceries, travel, etc. One must check on these segments beforehand to reap maximum benefits of paying via credit card.
If you intend to save money, while swiping the card then it does require smart planning. First of all never miss the monthly credit card repayment date. In fact, set up standing instructions on your account to clear credit card payments on a specific date, every month. That way you will never default on card payment and the credit score remains clean. Timely payment ensures that you don’t end up paying interest on the money already spent. Remember Warren Buffett’s golden words, never lose money and always remember this rule. Monthly payment also keeps one from going overboard while shopping. Since the money has to be available in the account to clear the credit card payment, it is easier to make calculations which then help contains the excitement. So it’s basically about shopping smartly by deciding on the purchase to be made and then saving up on it through cash back offers.
Offers may backfire
Which means, if shopping is not planned, it is easy to lose track of expenses while being focused on cash backs offers or other reward schemes. Always remember that you are going shopping because there is a need to make that purchase. Purchases have to be driven by needs and not offers. How many times have you picked average products simply because they were being offered at discounted rates? Well, it’s only human to fall prey to such alluring retail temptations. If a purchase is unplanned then it is difficult to arrange funds to clear the credit amount at the end of the month. As a result, interest is levied which is definitely greater that the cash back offered. Now this is one financial situation you don’t want to be into.
Choices for cards
With an array of options to choose from, making the right choice for a credit card seems mind boggling. To make it simpler for you, first of all check on the annual fee amounts of these cards. Now compare this with other features like payment terms, rewards and cash back schemes and if the card can be used at various locations in case you are an extensive traveler. Making a choice is made easier by banks, who have categorized credit cards for offering cash back basis the nature of expense. For instance, cards offering cash backs on dining options, utility bills, travel bookings, groceries, etc. After analyzing your personal spending patterns and the cash back percentage offered, the card which best suits you can be chosen.
While the points above will help in picking the right credit card and using it appropriately, the decision of issuing the credit card lies with the bank. Basis the credit history and after checking on the CIBIL score, an offer is made. The card will certainly add to your savings when used smartly.
The author is Co-Founder & Director, CreditVidya.