However, on the other hand if you are diligent with your money, have a habit of keeping a track of your expenses or run into emergencies that calls for the usage of a credit card, then by all means you can prudently tap the advantages this piece of plastic has to offer!
Credit cards do qualify as a good alternative method of making payments. Using credit cards offers several advantages over traditional methods of payments like making cash payments.
Credit cards are safer than cash
It is much safer carrying credit cards than carrying cash. It is a safer mode of payment, especially for large amounts, as one does not have to take the risk of
theft that comes with holding large cash amounts. In case of theft too it is easier to minimize and recover from the loss. To give an example, Anita uses a credit card to pay for majority of her expenses. To her misfortune, her purse was stolen.
It contained Rs. 1,000/- in cash and a credit card with a credit limit of Rs. 25,000/-. She immediately lodged a police compliant and also called her credit card company to report the theft. Her credit card company immediately froze the card and hence nobody could use it to make unauthorized purchases. It also cancelled her existing card and sent her a new one within a week and she could start using it immediately.
The police did not have enough information to track down the thief so she knew she did not have a real chance of getting back the cash. She had to give up on the Rs.1, 000/-. So how much did she really lose because of the stolen purse? She could cut her losses because she used plastic money for most of her purchases and did not carry heavy cash with her. That is the advantage of using a card.
Credit cards encourage better record keeping
Credit card statements provide a detailed list of all your expenses. It is just easier to keep a record and track expenses incurred using credit cards. Keeping track of cash expenses becomes difficult as one spends more and more in cash. It is not practical to write down each expense. For example, if in a day, Anita spends Rs. 40 on grocery, Rs. 150 on fuel, Rs. 100 in a restaurant and Rs. 50 on a gift – all in cash. She does not write down these expenses as individually each expense is petty and not worth the effort.
She also thinks she will remember where she spent all her money (don’t we all do?). At the end of the month she has spent over Rs. 8000/- and is not able to trace back all her expenses. Anita is left wondering where what happened to all that money? Further it is difficult for her to track if she is going overboard with any of the expense, as she does not know how much she spent on each category of expenses. Do you think that this scene would have been different had she used her credit card for spending money?
Credit cards can help you tide over liquidity crunch
In a particular month, Anita had to pay her utility bills but did not have the cash to pay them. Her credit card usage was well within its credit limit. She also knew that she would receive her next paycheck in 5 days. Anita used her credit card to make the payment on these outstanding bills that were due. She got her paycheck on time and she also paid her Credit Card Company as soon as she received her monthly statement i.e. within the grace period. Her credit card helped Anita to tide over her liquidity crunch.
It is important to note that Anita just had a current liquidity problem. She had her paycheck coming in 5 days. She used her credit card to just help her cross over these 5 days without having to pay penalty on her bills. She also paid her credit card bill in full without paying any interest on it. It is important to use credit cards wisely and not treat them just as extra cash and use them to make purchases that are beyond your limits. Swipe your credit card only if you know that you will be able to make full payment on your credit card bill when it becomes due.
Credit card offers several incentives
Using credit cards offer several incentives like reward programmes. Anita’s credit card offers her incentives like cash back, fuel points, frequent flyer points and frequent shopper points. She spent Rs.35, 000/- last year at shopper’s stop.
She used her credit card for each of her purchase there as it gave her frequent shopper points. At the end of the year she had accumulated 350 points on her card. She could buy a pair of jeans using these points and did not have to spend an extra buck!
Source: Economic Times
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