How to use Credit Card Efficiently?

Greed is Permanent Slavery

Hello everyone, posting this blog after a long time. But I thought it’s the need for time & COVID have affected a lot of people, few are affected healthwise and few financially. This blog is for them who wish to keep liquid money in hand rather than spending on day to day purchases, which will help to overcome unseen scenario that might affect any individual and might need financial help.

Before I start the blog would like to make a note, this blog will be helpful only for the individuals who are confident enough that they can earn monthly, so that they can pay back the credit card bill.

This blog might be not that useful for everyone, as most of us know how to effectively use Credit cards, but the one who is not aware of the benefits of using a credit card, this blog will surely help them to understand the same.

Before we directly jump on the Benefits of Credit Card, let’s have a look at products provided by the bank and corresponding interest rate ( approx .):

  • Home Loans: 8% Per Year = 0.7% Per Month
  • Personal Loan: 12% per Year = 1% Per Month
  • Credit Card: 36% Per Year = 3% Per Month

What is a Credit Card?

It’s similar to your debit card, but to have a debit card you need to have a savings account and money in that so as to make any transactions, but Credit Card can be provided by any bank without having an account in that bank.

Credit Cards are nothing but a certain amount given on credit so that you can make any transaction from the bank’s money, which has to be paid back on a specific date.

How the bank is benefited from the Credit Card Business?

Think logically, Banks business is lending money and earn from the interest they charge. Now as I have listed above the interest rate for products that banks offer and you will see credit card has the highest interest rate.

Every Bank has “Risk Appetite“, so how bank looks at the business:

More Risk α More Return

So what bank says, look boss we are giving you ‘X’ amount in form of Credit cards to utilize but we will charge 3% interest per month.

How to use Credit Card & its benefit?

Below are the basic information you should know related to Credit Card:

  • What is your Credit Card Limit?
    • How much amount is the bank allowing you to use in form of a Credit Card & later the Limit can be increased depending on your spending.
  • What is the Billing Cycle?
    • On which day you will receive the bill to pay back the utilized money.

How to use Credit Card efficiently?

Suppose I have ‘X’ Banks Credit Card:

  • Credit Limit 2,00,000
  • Billing Cycle: 1st of every month & last payment date would be the 30th of every month

Before I go in details of usage, will throw some light on billing cycle:

When you get any credit card, you will have a grace period of 50 to 60 days, grace period means how many days you can utilize the amount from your credit card till your billing cycle.

Let’s understand the credit card usage with an example:

As we discussed my billing cycle is 1st of every month, and the payment due date is the 30th of every month. Consider that today’s date is 2nd January 2020, I can utilize up to 2,00,000 rupee till 31st January 2020 as my bill will get generated by 1st February 2020, the payment of the bill generated on 1st Feb 2020 has to be done by end of the month, but as you know Feb month has 28 days (Non-Leap year) & 29 days (Leap year), so the bill due date would be 2nd or 3rd of Mar 2020.

Summary of above transaction:

  • 2nd January 2020: New Credit card cycle started
  • Till 31st January 2020: Suppose I utilize 50,000 out of 2,00,000.
  • Bill Generation date: 1st of every month, in our case its 1st Feb 2020
  • Bill Payment due date: 3rd March 2020
  • Benefit: For 2 months you have utilized 50,000 rupees without any interest & if you pay back the money on or before the payment due date, you will not be charged any interest.
    • Also, you get points on spending money using a credit card and that can be utilized for online shopping.
    • If you are not able to pay back the money of time i.e on or before the due date, immediate next day your utilized amount (50,000 rupees) will be charged by 3% of interest.

You will have many question now, if we miss any payment then it will be burden on us and so on?

So when you utilize the risky bank product, follow a few rules that will help you from NOT falling into trap of credit card:

How much amount to utilize?

Depending on your monthly income, your credit card spending should be in the range of 35%-50% of your monthly income, which will help you to avoid falling into the Credit card trap.

If you are a salaried person or have any business, you will have 2 months of income to payback one bill cycle and you will always be in a safe zone.

Never be Greedy:

Always stick to your threshold of Credit card spending, never exceed your 35% to 50% threshold, or else you would land up paying a lot of interest amount.

Why Use a Credit Card?

The world is full of surprises and we never know when and how we might need liquid cash, the worst situation never come to knock our doors and tell us, “ hey your worst time is going to start be prepared as you will have a lot of financial burdens

So to cover any uncertain situation on which we will never have control, why not efficiently use credit cards and try to at least hold a maximum of our hard-earned cash in our bank account, it’s always a Win-Win Situation right?

One more benefit you will have is if you have money in your bank for a long period, the bank pays you interest, isn’t it cool? Use banks’ money for basic needs and get paid by the bank in terms of interest.

All the above-mentioned things are possible when you have discipline in the way you spend your credit card money.

Many people asked me why not use Personal Loan instead?

When you take Personal Loans you will get a lower interest rate compared to Credit card, but interest will be applicable from the 1st month of disbursement of Personal loan, whereas in the case of a Credit card if you utilize it properly you don’t have to pay a single extra penny to the bank, not even interest amount.

If you want to use the money for monthly transactions, then a Personal Loan is not the best option, this is my personal view

How is Bank Benefited by Credit card?

This is an evergreen question that comes up in all discussions I have, how a bank is benefited from the Credit card business.

Bank know how greed will let people fall into the credit card trap, so I mentioned previously as well, don’t be greedy, always spend wisely when you deal with Credit cards.

This is how the bank thinks:

Suppose they have given a credit card to 1000 individuals and out of that, 900 are the one who will spend wisely, but the remaining 100 individuals might miss to payback and this is where they are earning profit out of the Credit card business, from the user like you and me, we have decided our threshold and this operating model will go against Banks strategy.

Ultimately from customers like us, they have no loss no profit, so we are not helping them grow any business, but they wait in hope that one day we will miss any payment and they will charge interest. Hope after reading this blog you will never give banks the chance to win.

A warning message:

Never provide your Credit cards details to any one, no matter whatever is the situation.

Details such as Credit card CVV & OTP, sometimes you might get fraud calls like we will activate your card just provide details, avoid the same. “Banks never call“.

Hope my Blog will bring some change & add value to your life.

Once again thanks for reading my blog till the end, it means a lot to me, and your comments would be cherry on cake as it will keep me motivated to post more blogs.

Stay Safe & Healthy.

Cheers everyone & have a happy spending.

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