Credit Cards: An effective tool to master the art of financial discipline

Posted on Friday, January 21st, 2022 | By IndusInd Bank

The pandemic has shown us how unpredictable life can be, and hence, a discussion on financial discipline is more critical now than ever.

While you may be in the process of jotting down your financial goals for the year and budgeting in a credit card might seem paradoxical, but using one can be beneficial in the longer run.

Take for instance, individuals, who perhaps have just begun their careers. A credit card can help inculcate effective money management skills at an early stage of their life. Using credit cards responsibly can boost an individual credit score, and help save money the next time you think of availing, or re-financing a home loan. A healthy credit score always puts you in a stronger position to crack the best deal with your lending entity. Moreover, a disciplined usage can also give a few additional weeks of flexibility to your budget if you maximize your grace period.

In a nutshell, a budget that involves a credit card needs to be carefully crafted basis your financial comfort so that you can make the most of your purchases without having to worry about re-payments.

So, what kind of benefits can one reap using a Credit Card? 

To begin with, let us examine some of the top advantages of using a credit card:

Credit grace period (Spend Now Pay Later): Arguably, the most attractive feature of a credit card is the interest-free grace period that can be availed by users provided, the amount to be repaid, is cleared by the due date. IndusInd Bank allows up to 50 days of credit to its customers without having to pay interest.

Credit score: Since credit card transactions are similar to availing loans, all such transactions are reported to the credit bureaus that use them for calculating, as well as building your credit profile. Credit scores become crucial if you plan to avail loans towards business expansion, vehicle purchases, personal needs, or simply buying a new home. A healthy credit score empowers borrowers to negotiate the best deal with the lending institution, thereby helping them fulfil their financial goals.

Rewards and Benefits:  These include benefits like discounts, cash backs, reward points, loyalty credits, complimentary club memberships, free access to the airport lounges, among many others. You must select the card that offers the most and matches your lifestyle requirements.

1. Standard reward programmes across cards include:
2. Point-based earnings that can be accrued and used for redemption on a later date
3. Frequent flyer cards that help you accumulate airline miles to redeem discounts on future flight bookings.
4. Reward-based discounts on spends incurred on goods and services

Cash flow planning: You can time your big-ticket purchases in a way that can help you gain a longer credit period. Making purchases through credit cards in the initial days of the billing cycle can maximize the grace period. Some card issuing companies provide a graphical view of your spending pattern that are divided into period buckets basis expense categories. This can help you analyse your expenses and make necessary adjustments to your cash flow plan.

Credit card EMIs: Banks and financial institutions offer Cardholders the option of paying for certain purchases through Equated Monthly Instalments (EMI). In fact, several card issuers even walk that extra mile, to offer interest-free EMIs with tenures ranging from 3 to 36 months. This is a useful option for those who do not wish to pay for large purchases in one go. Instead, they are comfortable spreading out the re-payments over a few months.

Instant pre-approved loan: Credit card issuers offer pre-approved loans to card users with a healthy re-payment record and credit profile. Some credit card issuers offer loan amounts (with tenures ranging from 6 to 36 months) that are over and above the approved credit limit. This comes handy in case of financial exigencies.

Given these merits, it is pertinent to know how exactly does a credit card transaction work?

Unlike debit cards, when you pay using a credit card, the money does not get deducted from your savings or current account, but a fund pool which is pre-defined by your Bank or the lending entity. In other words, a credit card is a more tangible form of a Buy Now Pay Later (BNPL) instrument.

However, it is essential to use your credit card responsibly.

Avoid the following mistakes for a smooth credit card journey:

• Missing a payment and carrying forward the balance to the next billing cycle would attract interest charges.
• Making only the minimum payment and not clearing the entire due amount
• Not reviewing your card statement to check errors and fraudulent transactions
•  Not making sense of your APR (annual percentage rate) and applicable fees
• Not being aware of applicable offers and rewards
• Maxing out your credit card by using the maximum limit
• Applying for a new credit card too often, and closing the older one affects the credit score

Credit cards become a valuable financial tool once you learn to use them sensibly and responsibly. It offers rewards, protection, convenience and helps build an effective credit score. If you use a credit card carefully, there is no reason to worry. Avoid common mistakes, and you’ll reap the most out of this efficient financial tool.

Want to explore the best credit cards available in India? Here you go!

Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information.