Most banks issue these cards to their loyal clients as an effective financial instrument.
Credit cards
Whenever you think of the best tools for personal finance, credit cards often come up at the top of this list. In fact, as of February 2024, about 100 million Indians have been known to use such cards for different types of purchases. The reason is simple - they offer several benefits while at the same time helping increase your credit score. Here is a comprehensive overview of what these cards are, how they work, their types, and the wide range of benefits they offer.
What Are Credit Cards?
Most banks issue these cards to their loyal clients as an effective financial instrument. Their sole purpose is to serve as borrowing tools. If your bank has issued you a credit card, you will find that this card lets you borrow up to a specific limit (known as a credit limit). You are free to use this credit limit to make any type of purchase you desire.
Each time you make a purchase using credit cards, your credit limit reduces by exactly that amount. At the end of the billing cycle, the issuing bank sends you a statement for the amount you have used up. You will have to pay off this borrowed amount to be able to use the full amount of your credit limit on your card the next month.
Since credit cards work on a revolving credit model, as explained above, they are a great way to borrow, repay, and re-borrow for short-term financing needs.
Key Types of Credit Cards
When applying for these cards, you must know that different banks offer different types of cards. Starting from regular cards to even cards tailored to meet the needs of low-income individuals like students.
- Rewards Credit Cards
These cards have attractive offers like loyalty points, cash backs and even travel miles accrued upon making purchases.
- Balance Transfer Cards
These cards help to transfer credit card loans from a high-interest to a low-interest card, making it easier to pay off these debts.
- Secured Credit Cards
These cards are ideal for those with low credit scores. They are often issued in lieu of a fixed deposit, which serves as collateral.
- Student Credit Cards
These cards are made specifically for students. Students tend to have weaker credit histories, which is why these cards offer lower credit limits and little to no hidden fees.
Benefits of Using Credit Cards
Besides the unique benefits of different types of cards, there are some generic benefits that credit cards offer.
1. Convenience and Security
A credit card can be convenient because it eliminates the need for carrying a large amount of cash when making high-value purchases. Moreover, these cards have advanced security features that make them safer to use for online transactions.
2. Credit Building
With regular payments and low credit utilisation, these cards can help to build your credit score. This can even increase your chances of securing a loan at low interest rates.
3. Rewards and Perks
Some specialised cards like Reward Credit Cards offer exclusive benefits like cash backs, loyalty points, etc., which can be applied to future purchases on the same card.
4. Emergency Financing
A credit card can also be used for financial emergencies, such as sudden medical expenses. Most healthcare facilities accept these cards as a valid form of payment, making them a financial instrument you can fall back on during medical crises.
5. Purchase Protection and Extended Warranties
Some credit cards even come with special features like extended warranties, return protection, and coverage for lost or damaged items. These can come in handy when purchasing high-value products.
Responsible Usage Tips
Given the wide variety of purpose-specific credit cards and their several benefits, using such cards can be quite tempting at times. This is the main reason you should be careful when using them. Here are some helpful tips to ensure good financial discipline.
- Always pay at least the minimum amount due by the due date.
- Aim to pay the full balance each month to avoid interest charges.
- Monitor spending regularly to stay within budget.
- Avoid cash advances due to high fees and interest rates.
The Takeaway
Hence, credit cards are not just a mode of payment but also a comprehensive financial instrument to accrue loyalty rewards and to use during times of emergencies. While they may increase your purchasing potential, you must be careful not to overspend using these cards. With strict financial discipline, a credit card can become a formidable tool for your financial freedom.
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