Credit cards, which started their life as a product of the ultra-rich, have now become a financial tool in their ubiquity. It has now evolved into a personal finance management tool that is far beyond its original use as a means of accessing credit.
Credit cards offer benefits such as cash back, loyalty points, and provide additional facilities like lounge access, while also protecting customers. Its use, while highly beneficial, can be a strain on individual finances if incorrectly managed. The advantages of interest-free credit periods and being able to manage unexpected expenses are a boon; it is critical not to let them become a bane.
Costs associated with the credit card
Credit cards also come with some obligations that must be understood and adhered to. The lack of which can lead to incurring high interest rates on unpaid balances, as well as fees and penalties. Not only is this a financial burden in itself, but it also puts an undue strain on the individual’s credit score.
Knowing these rules and the lay of the land becomes essential to ensure that one is getting all the advantages and is protected from all the downsides that can occur. The customer must be aware of all the terms and conditions associated with this financial tool and maximise the advantage while minimising the costs.
Building a strong financial identity
Credit access is one of the most important strengths that each individual must wield. It is especially true for young professionals and freelancers who are new to credit and have not yet established a credit history. Building their credit score through microtransactions and consistent on-time payments.
It is also important for them to maintain a low credit utilisation ratio – ideally below 30%. The disciplined use of the credit card not only increases credit access strength, but overall financial credibility is enhanced.
The credit scores become increasingly important when aspiring for large purchases that require financing, such as personal mobility and home ownership. The absence of a credit score or a weak credit score immediately puts the individual at high risk as a borrower, even with strong financial discipline.
Embedding credit cards in the individual finance stack
Every smart financial strategy, which includes budgeting, investment, and goal-oriented spending, should also incorporate credit cards as a sound financial strategy. Keeping a close eye on credit card usage, alongside other key financial tools, using credible dashboards, becomes an essential pillar of good personal financial hygiene, supporting overall financial health.
Key tips for individuals to improve their credit card usage
- Orientation of credit cards as a part of a larger financial plan, and not in isolation
- Monitoring of spending and alignment with savings and investment goals
- Analysing spending trends and patterns to improve financial health
- Making sure the utilisation ratio is in a healthy space
- Paying dues on time and even before time
- Reviewing credit reports and credit scores, and correcting any anomalies
Credit card as a capability and not as a curse
Credit cards are powerful tools and can help individuals achieve greater financial goals when managed wisely with intelligence and intention. Combining informed decision-making and disciplined repayment can help individuals maintain prosperous finances and develop the potential strength to borrow in times of need.
Sachin Seth, Chairman CRIF High Mark and Regional MD CRIF India & South Asia
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