With the digital revolution taking a stronghold in India, there is a considerable rise in digital payments and purchases. And with it comes a large amount of options to pay online. From the traditional banking methods such as NEFT & IMPS transfers to newer UPI/BHIM payment methods which help you to directly pay off your purchase from your bank balance. Then comes in the online wallets. From PAYTM to Amazon pay to Mobiquik, there are a plethora of options to choose from. You simply load up the e-wallet with money from your bank account and then pay easily using those wallets. But there is another option where you don’t have to directly use up your bank account balance to pay for your purchases. That option is a Credit card. And today, we’ll have a look at the credit card option and why I’d prefer it over other banking methods.
Credit cards are looked upon very badly in our society as if it is some kind of evil and it’s here to destroy your life. However, it is just a piece of plastic and it is neither good nor evil. To improve your life or to destroy your life totally depends on your self control. Now if you’re someone who has previous problems with debt and out of control spending, look right away as a credit card is not a good option for you. However, if you’re a normal person with a normal spending and good budgeting capabilities, then using a credit card is a very good way to maintain your finances and even gain some of your money spent in the form of cash back or store credits.
So what is a credit card and how do you get it? A credit card looks just like a debit card and is issued by a Bank. However, instead of using up your bank balance, the bank provides you with a credit limit. It is the amount of money you can use that is provided by the bank and once the bill is due, you have to pay the money back. If you pay them back entirely before the bill due date, you don’t have to pay any interest on the amount borrowed. so it is as if the bank is providing you with an interest free loan for 45- 50 days. If you’re planning to use a CC, this is the only way you should be using it. If you don’t pay off your usage in entirety before the due date, you’ll be charged with an interest rate of 2.5% to 4.5% per month depending on your credit card account. That is like taking out a loan on an interest rate of 35-40% per year. A quick way to lose your money.
So coming back to online shopping, while doing online payments, there are several reasons I prefer credit card over debit card.
- Earn interest on your money while using the bank’s money for free. Every month, as I get my salary, I have a budget ready for the next month where I have a known amount of expenses ready. I put that money in a monthly FD so it starts earning interest. Then, I use my Credit card to pay off my bills and purchases. Making sure that there are no additional purchases made and I remain within my budget. At the end of the month, when the CC bill is generated, it is the same date when my FD is matured. I pay off my CC with the FD principal and the interest is my profit.
- Your money is not stuck if the transaction fails. Let’s take a recent example of a purchase I made on Amazon prime day. Prime day on amazon comes with a huge amount of deals for which I had already saved up the money. As soon as the clock hit 12, I added all items to my card and proceeded to checkout. After the payment was made from my end, there was some problem and payment never reached amazon. I contacted them and they said it would be paid back in 3-4 business days. Alright, now I don’t have my money, I don’t have my order and by the time I get my money back, the offers would have all expired. Luckily for me, I had purchased the items using my credit card and although I used up a large amount of money, I still had 3x more credit limit available on it. So I ordered again, got the payment processed and the items were on its way thanks to amazon 2 day delivery. Couple of days later, the failed transaction was rolled back and my credit card company got the money back so it was not billed to me. If I had done the same payment using a debit card, I would have been out of my money for 4 days and could not have taken advantage of the offers even after months of savings just for this occasion.
- Store offers: Many banks have their credit card offers with a tie up with selected stores. If you buy on let’s say amazon using American express card when they have a 15% off offer, you get that offer. When I bought from Amazon on prime day, I bought everything using Amazon ICICI bank CC. It had 5% immediate discount + 5% cash back totalling to 10% less on my purchase. Needless to say, I got a lot of cashback on that day.
- Reward points: Almost all CC companies have a reward point system. If you buy something using their card, they will give you 0.25% to 10% of the amount in the form of reward points. You can redeem your points on their own website or partner website for food, hotels, flight tickets and a lot more. All this for just spending the amount you were going to spend anyway.
- Security: Online transactions come with a lot of risk from hacking and data leaks from store websites. If you use a CC to buy online, if someone hacks your card and makes a fraudulent payment, you’re safe. Just call up the bank customer service and inform them about the hack. American Express is very helpful in this regard and will revert the transaction immediately. You can then proceed to block that card and you’ll receive a new card immediately. Other banks will ask a few questions and will revert the transaction too. On the other hand, if your debit card was stolen to make a purchase, you’re in deep trouble. You’ll have to go to the police and file an FIR and then go to your bank and ask for your money and if you’re lucky you’ll get your money back. And till you get your money, you’re in deep trouble as all of your money is gone and you don’t have anything left to work with.
- Purchase protection, extended warranty and insurance: I am clubbing these three together and these are sometimes not offered by your CC so make sure to check your bank terms and conditions. Purchase protection means that if you buy something online and the seller doesn’t send you the item, you can ask your bank to revert back your money. Extended warranty means that if you buy something for example a laptop. It comes with a 1 year manufacturer warranty and for additional warranty you have to pay extra. If you buy using the CC, the bank provides extended warranty from their side so you save a lot of money that way. This is however, not covered under all cards. Insurance comes under travel categories. If you bought your flight tickets using the credit card, the bank will provide you with some kind of life insurance or travel insurance depending on the type of CC you have. This is very beneficial in case of a mishap like your bags getting destroyed.
Now you would be wondering what is the bank’s advantage while it is providing you with all such benefits for free. This is a valid question and the reason is that a credit card is not “free”. You’re paying for the credit card with an annual fee if the card is not Lifetime Free. This annual fee can be waived off in majority of cases with a minimum spend. Also by default, the bank collects a part of the transaction as a fee and the seller is eating up the charge. Another reason is that they want more people to buy credit cards and spend more money than they have so that they can’t pay off before the due date and so have to pay interest at a very high price as well as Late fee if they don’t pay the minimum amount due which is the real bank business. But we don’t have to follow their rules. Just spend within your means and use the cards wisely and there will be no trouble for you.
So these were my top points in favour of Credit cards. Next time i’ll explain why you may not want to use Credit cards and prefer to go the Debit card route.
