What is the purpose of credit cards?
Purpose of credit cards, we have to understand it from both aspects. Firstly, from issuer point of view and secondly from user point of view.
From issuer point of view, it falls under asset category means it’s the instrument for banks which earns money for them.
That is the basic reason why banks enforce us to get it.
How many times banks enforce us to get debit cards? Hardly one out of ten times.
But for credit cards they enforce us ten times out of ten. Because it’s their asset.
Every bank wants their asset size should increase like loans. Saving account or Fixed Deposits are liabilities for banks as they have to pay interest on it to their customers.
Loans disbursal also falls under their asset class. When a person takes a loan then he/she becomes an employee for bank without any salary till for their loan tenure time.
So underlying purpose of banks or other financial institutions on issuing credit cards is, you get it, then overspend on your wants and default on repayments.
When you default on repayments then they will earn up to 46% interest on these repayments and you become an employee for them without any salary.
Now you are thinking if this is the harsh reality behinds the credit cards then what is the purpose of credit cards for myself?
So here we will discuss purpose of credit cards from user point of view.
But before discussing further there is one strict guideline for credit card users.
If the reliable earning is the top line then your discipline is bottom line to exploit the benefits of credit cards.
So, let’s discuss point by point.
Gives Freedom
The first purpose solved with credit cards, it gives freedom from many things which happens with us.
Suppose you are surfing on Amazon or Flipkart for something which really needs you now.
You also know currently you have no money but when salary will come then you can do repayment within time.
Then the credit card gives you freedom to buy that thing and you know nothing more important than freedom.
Credit cards, like HDFC Diners club black premium credit card gives the freedom to access other many benefits, which could not be avail with other simple category cards.
It gives freedom from mental tension, how?
If any important expense is on the way and you have insufficient balance in your bank account.
Now you have two options here, either asking someone for money and feel embarrassment or pay through credit cards and none would know how you managed the whole show.
Which option is better in today’s world? Feeling embarrassment or payment through credit cards.
Hope so, now you got your answer.
Our reputation is everything in our social life else people are ready with bullshit comments.
So, with this you are now tension free because you know the outstanding payment can be done through credit cards & could repay after that.
How big relief with credit cards you received? Think about it…
But again, the bottom line is your discipline else the purpose of credits cards would fail.
So, the first purpose of credit cards solves here, it gives us the freedom to spend on important things because a stich on time saves nine.
Managing Sudden Expense
This really happened with me when few years back had gone for some external training along with other participants. As planned we have to stay in hotel for five days training.
Everything done by our organization to attend this training in that hotel. Other participant also reached there from other units of our organization.
We check-in happily and attend trainings for five days.
On the day when we have to checkout, a message came to us.
The whole expense of hotel has to bear yourself and reimbursement can be done after that as some technical problem coming to pay off hotel’s charges.
None of us were prepared in such a way and feeling entrapped and embarrassed.
But luckily, I had a newly issued gold credit card by HDFC bank along with me.
The whole payment of hotel being done through that credit card and come out that dilemma.
On that day I felt the power of credit card.
From that day till now in 14 years I am using its advance version of this card without giving any extra penny of renewals to issuing bank.
So here the second purpose of credit card solves, how it can manage any sudden expense.
Ease of International Buying
As you know all international transactions happens in dollars.
Whatever the currency of your country, if you want to purchase anything internationally, then you have to do payment in dollars.
This job can be done very easily with credit cards with some currency conversion charges.
Suppose you have to buy books or attend webinars of international renowned personality. This can be done with very ease.
You can also renew your licenses of worldwide digital products which deals in dollars.
The third purpose of credit cards solves here, how you can buy internationally with ease.
Cash Back Offers
In 2020 I purchased the SONY Bravia Smart LED tv with good cash back on credit cards and no cost EMI offer
The shop keeper told me that either you purchase it cash or credit card the price would remain same.
He also told that one bank’s credit card giving 10% cash back offer along with no cost EMI, if you possess it.
I also verified from other shops also but price of tv was same whether you are paying cash or through card.
So I went with cash back credit card offer but by managing risk factor associated with it.
The amount which I have budgeted for this tv, put in liquid mutual fund. So that if something went wrong then couldn’t entrap in it.
After paying third EMI, I got my cash back which was good handsome money.
So have learnt from this incident if you have discipline and risk management in place then you can exploit the benefits of credit cards.
This is the fourth purpose of credit card for you with which you can save money.
CIBIL Score Improvement
CIBIL (Credit Information Bureau India Limited) score improvement happens with usage of credit card if you are doing repayment of outstanding amount on time.
This score is much needed for financial institutions to decide whether they should give you loan or not.
This score varies from 300 to 900 value. The 300 is very bad score whereas 900 is very good score.
If you have CIBIL score more than 750, will not face any issue for taking loan from any financial institutions and bargain the interest rates with them.
But at the same point if you are using your card excessively up to 80-90% of card limit, then it could downgrade score also.
So discipline again playing pivotal role here.
If you are planning to take home loan in future, then start to spend through credit card.
Pay outstanding amount on time without any minimum dues.
Over a period, your CIBIL score with this practice will become good and you can take home loan easily.
This is the fifth purpose of credit cards which solves the CIBIL score problem if you have discipline about your expense.
Make Your Credit Card As An Asset
Now you are thinking, if a credit card asset for banks then how same thing could become asset for me?
Wait…
In the book RICH DAD POOR DAD, Robert T. Kiyosaki mentioned that you can become rich by using two tools.
The first is OPM i.e. Other People’s Money and the second one is OPT i.e Other people’s Time.
Here we will use both i.e. Money of Banks and Time given by banks.
Any credit card gives you 50 days as a grace period to pay your outstanding amount.
Suppose your credit card cycle starts from 8th of month then you have to pay on next month’s 28th date e.g. if some expense done on 8th Aug then have to pay on or before 28th September.
This means you have 50 days in your hand to pay your outstanding amount.
Now instead of using own money, use your credit card and invest your own money for that 50 days in some overnight or liquid mutual funds.
On the day of repayment withdraw amount from these mutual funds and repay all you outstanding amount.
The interest earned for these 50 days will be yours. Hence you converted your credit card as an asset.
This is the sixth purpose of credit cards with which you converted it into asset class.
Conclusion
The credit card is an asset class for banks but how you could convert it into an asset for yourself, needs self-discipline.
If you can do this the purpose of credit card solves for you and can take lot of benefits of this as mentioned above.
Last but not the least the credit card is good servant but very bad master.
In any condition you must not entrap yourself into credit card debt and exploit as many benefits with your reliable income source and self-discipline.