Why you should have a Credit Card

Recently I was chatting with my cousin who works in fintech sector. I was shocked to know that he doesn’t have a credit card. This coming from a dude who works in finance sector though isn’t a finance bro was shocking at the least.

I was more shocked because our profiles are almost similar – similar age, similar income and almost similar lifestyle. Although I must say he’s way more frugal than I am. Without sounding like I’m bragging, I fall into a category of salaried individuals who are in top 10% in the country. Everyone I know around me owns credit card or even multiples. I wouldn’t know whether they pay off the entire balance every month but they seems to be doing well.

Let’s go through why one wouldn’t want credit card.

If you don’t believe you can manage your spends if you have an open line of credit available, you certainly shouldn’t get a credit card. It’s important that you don’t fall into the trap of minimum dues. Credit card interest rates are among some of the highest debt rates ranging anywhere between 17-21%. If you don’t manage it well, it’s really easy to get stuck in credit trap. If you’re on this blog, I assume you’re too working towards financial independence. One of the first step towards financial independence is getting your expenses under control. It’s not necessary to go extreme frugal but one should have a basic understanding of how much one can spend and where. Budgeting is really important. If you can’t, don’t get a credit card. Period.

Now there’s literally no other reason to not get a credit. If you have the above under control, let’s continue to understand why getting a credit card makes sense.

Building credit score

When you get a credit card, you have an open credit line available. You utilize that credit line every month and when you pay that in full every month, you slowly build your credit score. Building a good credit score is important. This will help you in your future major purchases. I recently got a home loan, and kid you not I got a really awesome interest rate for maintaining a good credit score. I will be saving a few lakhs when I pay back my loan due to lower interest rates. However besides that, if you have a bad credit score it’s also difficult to avail a bank loan. Now this gets you into catch 22 situation. Let’s assume you want to make a large purchase, you ask your bank to give a loan but they refuse since you have a bad credit score. When that happens you have to take a loan against asset or maybe even get a payday loan. The problem with such loans is they come with a high interest rate. Much higher than what a bank would have authorized. You’ll end up paying way more in interests with such types of loans. It’s best to just avoid.

When it comes to normal salaried people if we have to make any large purchase there’s no other option than to take a loan. We don’t have cash lying around to make such large purchases. And if you have that much cash lying around, you should be investing it. Haven’t you heard cash is trash? Once in your life you’ll end up making a large purchase. Most often than not for any middle class people it would be a real estate investment. Even if it’s not in your timeline right now, it’s better to be prepared.

Credit card is safer

When you swipe your credit card, your bank doesn’t immediately make a payment to the merchant. If you login to your credit card portal you’ll notice that your purchases are categorised under billed and unbilled transactions. So let’s say you have to dispute any transaction for whatever reason – fraud transactions, you were charged incorrect amount you get a chance to dispute the transaction. What this means is you don’t have to immediately pay for fraud transaction while your bank resolves the issue with the merchant. With growing digital economy chances of such fraud transactions are only going to increase. If this were instead transacted on your debit card, the amount is immediately debited from your account. So even if you dispute it with the bank, it’s going to take long for the resolution. This also means that you cannot use that amount for anything else. If you had earmarked that amount for electricity payment, you’ll have to make sure you are able to pay the bill from other category.

Credit card points

I’ve kept this point at the end because almost everyone who gets a credit card is already aware of credit card point. Infact credit card points is the major attraction towards getting a credit card. And that’s completely okay. There are multiple types of credit card benefits available and depending on which type you want it to be you can choose between cash back, in airline rewards, among others. This blogpost is not about the types of credit cards so we’ll keep this topic for later. Managing multiple cards depending on what kind of rewards you want can not only help you financially, it’s a great feeling too. I have received so many Amazon vouchers with one of my credit card that I get more value from it than all credit card fees put together.

If managed correctly, a credit card has a lot to offer. So don’t shy away from it just because you’re scared or media has created this image about credit cards.