Credit Card for Financial Planning- an intelligent option

What prompted me to come up with this post was a series of phone calls from friends and then finally a function in the family. The phone calls were routine and rather innocuous but got me into some serious thinking. My friends keep calling me, mostly asking for my credit card details for making their travel bookings or paying mobile bills when the due date is approaching or when visiting the store is a hassle! Two of them have stopped using ‘plastics’ as they were unable to control their spending habits and the ever increasing offers were too alluring, finally resulting in a never ending debt trap.

One of my friends called me two weeks back and asked if he could order a water filter through a leading e-commerce site using my credit card as he was getting a very good deal and there was a cash back offer of up to 5%, on this particular bank’s card.

The ultimate trigger for this article was the wedding in the family last week. You must be wondering as to how did it bother me- it did, for an important reason- the mode of payment. Indian weddings are a lavish affair and however hard we might try; even the ‘necessary’ expenses are way beyond imagination and are always exceeding the allocated budget.

This is what I want to stress upon- approximately INR 7,50,000 was spent towards jewelry,dresses and gifts-I have included only these three categories as these are the ones where payment could have been made using a credit card. These are approximate costs and the final cost was slightly higher.Why am I rooting for using a Credit Card?

A little planning would have worked wonders in terms of savings and ‘earning on spending’. Let us see how- I have 3 cards from different banks or providers, on one I get one point for every INR 40 spent and on the other two, one reward point for every INR 50 spent. In this case, the transaction would have accumulated 18750 or 15000 points respectively (given the credit limit is available,obviously). In addition, had there been a shopping festival or some other promotional offer, the points would have multiplied manifold.

The entire payment was made in cash- this amount lying in savings account would have fetched interest for a good 50 days (credit period offered by most providers). Add to this cash back offers-even a 1% cash back offer (or whatever the maximum amount it is capped at) would have been beneficial. I calculated this keeping in mind my credit cards and with maximum cash back capped at INR 5000, the total cash savings would have amounted to approximately INR 12000 (including interest earned at 7% for 50 days).The points earned in the bargain could have been utilized later as per requirement and options available.

We might want to strike this off as a onetime purchase and the amount is also huge.However, if you really plan your finances well and start using your credit card intelligently, you would be able to earn reward points for the amount of money that you would spend on your monthly bills or purchases- mobile, electricity, internet, magazine subscriptions, dining out, etc.I did a quick calculation and was startled at the fact that the total annual spend was well above INR 2,00,000, with groceries, electricity bills and dining out contributing the maximum amount. I have become a proponent of using credit card for ALL my purchases since then.

Now coming to the reward points-if you have a credit card that offers you decent reward points on your purchases, then this should be the clincher- the next time you go for shopping, you would not want to carry your credit card. Most of the times you would be allowed to order gift cards of major shopping outlets, including apparel brands, grocery chains, gift shops etc, enabling your shopping using these ‘gift cards’. This is the reason you should look at the rewards catalogue and then decide what is it that you want to order using the points earned.

Some of the card issuers also give you an option of ordering a gift card similar to a charge card which can be used as a normal debit card for making POS or online purchases. I normally order this one as it gives me the freedom to ‘choose’

Conclusion:

You should have two or maximum three cards from different providers. Understand the individual billing cycles and then spend as per these cycles for maximizing benefits.

DO NOT make the payment towards your card the very next day of a purchase, just because you do not want to keep a payment outstanding or revolve credit- the benefits of a card are not for you then, as you do not understand the features.

Check the annual fees and other charges. An important point to note here is that most of us refrain from using cards that have an annual fee component, where as these are the cards that pack the maximum punch. If you use the card annually for a particular amount, the charges could be waived off, depending on the kind of usage and your payment history. The provider would not like to lose a good customer. Most of these high end cards with annual fees come with the best rates, customized offers and value added services.

Pay the credit card dues in full, preferably online, to make use of the maximum credit period, 2-3 days before the due date (or the last day, if the card issuer is your bank)

In terms of priority, keep the credit card payment on top, even before you pay your rent. Once you get into this habit, you would never think of revolving the balance on your credit card

Use your card on necessities every month and keep a track of offers- you would be amazed at how easy it is to earn points and cash back credits, of which sometimes you might not even be aware of.

The other benefits like free  insurance, frequent flyer miles, safety etc have been around for quite some time now, but the easiest and most visible benefits remain un explained mainly because we tend to ignore the positives of ‘plastic money’. A little understanding of the product, planning of finances and a strategy will go a long way in maximizing returns by using a product as simple as a credit card.

 

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