Use Your Brain Along With Your Credit Card And Save Money
When used smartly, a credit card can provide substantial monetary benefits. Before we look at how this is possible, let’s quickly go through the key points to remember while using a credit card.
- Don’t use your card for impulse buying.
- Your card usage shouldn’t exceed 60 percent of your household expenses of a month. For example, if your monthly income is INR 1000 and monthly expense is INR 800, you shouldn’t use your credit card for more than INR 480.
- Avoid using the credit card for buying luxury items, unless you have charted a mental repayment plan before. For instance, if you purchase a new-age TV worth 1.2 lakhs using your credit card, but haven’t given much or any thought to how you’ll repay, the purchase can cause much trouble and lead to delay payments. Late payments, in turn, means not only extra expenditure but also a blow to your CIBIL credit score.
- It is best to keep 1 credit card or 2 credit cards. Three cards are acceptable only in certain conditions and more than three almost never.
- In case your wife or children are using a card, it would be better if you go for Add-on cards for all members of the family as this way you all will be able to collect maximum rewards and also are more likely to observe financial discipline.
- Adhere to the best practices regarding ‘keeping the credit safe’ to completely obviate misuse. Remember, credit card safety is owner’s responsibility.
Now coming to the monetary benefits associated with the use of credit cards, here are certain distinct benefits of using it.
- Reward Points
Most banks offer their credit card users 2 reward points on every INR 150 spent. That is, you receive 1 reward point on every INR 75 that you spend. Let’s say, your monthly outstanding bill is 1 lakhs. In other words, in a year you make INR 12 Lakhs worth transactions using your credit card. Spending 12 lakhs in a year would mean collecting 16k reward points, which in terms of money means INR 5820.
The monetary value of each reward point is roughly 33 paise, as 1500 reward points allows you to buy an INR 500 worth product. So with 16k reward points you get an extra benefit of INR 5820. In other words, you save that much money every year.
- Interest Free Credit
The maximum interest free period on majority of credit cards is 50 days. This, as said, is the maximum interest free period: you will not get the 50-day interest-free period on all your transactions.
Let’s say your billing date is 18th of every month. Now, for a transaction done on 19th (a day after your billing date), the interest free period will be 50 days. Each day after that your interest free period will shrink by 1 day, that is for transactions done on 20th, the interest free period will be 49 days and for transactions done on 21st, the period will be 48 days and so on.
The shortest interest free period will be on the day before the billing date (in this case it will be 17th of a month) and the longest on the day after the billing date (here it is 19th).
To get the maximum possible interest free period, you should make big purchases on the next day after bill generation. This will help you maximize your saving and ultimately save money.
For instance, let’s say you purchased a new-age TV worth 1 lakhs on 19th to avail the 50-day interest free period. In other words, this 1 lakhs is like a personal loan you take on which you’ll not be charged any interest for 50 days. With most personal loans carrying an interest rate of 15 percent or more, this means substantial savings for you.
Another way to look at is that you made a purchase of INR 1 lakhs today but will be paying for it 50 days later. Now if you invest this 1 lakhs wisely, you can earn quite a bit amount in a 50-day period. However, do not forget to avail the Auto Debt Facility, which will ensure that the money is automatically deducted from your account on the last date of payment.
- Interest Free EMI
Majority of the banks in India offer a feature that allows their customers to convert their purchases into interest free EMI of 3, 6, or 9 months. Now if you make an expensive purchase on the next day of your billing, you can effectively get 10 months of interest free credit. Again, this can mean substantial savings, especially if you buy 2-3 luxury items after year and turn convert them into EMIs.
- Cash Back
Many credit cards include a cash back offer which comes into effect when you use certain services, like shopping from certain retail stores, booking air tickets from certain online portals, etc. Through this cash back offer you can save substantial amount. For instance most credit cards offer up to INR 500 cash back on air tickets when you book them from selected portals. If you travel, say, 5 times in a year, the saving amounts to INR 2,500.
- Discounts and offers
Banks frequently, from time to time, offer attractive discounts and offers on regular purchases. In addition to these, you get discount of 1 percent or 2 percent on many other routine payments that you do using your credit card. Availing these benefits can help you easily save a couple of thousand every year.
- Pay more than the minimum amount
Every once in a while, it is possible that you may not be in a condition to clear the balance in full at the end of the billing cycle. Even then it is advisable that you pay as much as you can and not just the minimum amount.
Lenders like nothing better than a creditor paying just the minimum amount due because they can collect a lot of extra money. Here’s an example to understand better.
You bought a pair of jeans for INR 6000. When the bill statement came, you sent a cheque of INR 180, which is the minimum amount due (Usually, the minimum amount is 3 percent of the balance). The interest rate applicable is 15 percent. Considering you make no new purchase, every month your balance will reduce slightly, and so will the minimum amount due, if you pay only the minimum. However, by paying only the minimum, you’ll be paying for this pair of jeans for seventeen years!
That’s no way to save money! If you just make a concious effort to use the right card for the right purchases at the right time, your wallet and CIBIL score will certainly benefit.