5 ways credit cards can improve your financial health

Credit cards are often believed to be the root cause of all financial woes and can also lead to a debt trap, if used recklessly. However, when used in a disciplined manner, credit cards can be an excellent tool for managing finances, saving money and building a strong credit score.

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Given below are 5 ways how credit cards can be beneficial for you:

1. Helps build your credit score

As transacting through credit cards is similar to availing loans, all transactions through credit cards are taken into account by credit bureaus for calculating your credit score. While one accrues interest on loans availed, credit cards do not include any interest cost as long as the entire bill is repaid by the due date. This makes it one of the most convenient and cost effective ways to build credit score.

“A credit score of 750 and above is considered as ‘good’ and those with such score have higher chances of availing loans and credit cards at possibly preferential interest rates and charges,” says Sahil Arora, Director, Paisabazaar.com.

2. Saves money through various card benefits

Credit card issuers offer various benefits to card holders in the form of discounts, reward points, cash backs, vouchers, etc. Many card issuers also offer various lifestyle benefits like complimentary club memberships, free access to lounge, etc. As these benefits can vary across different cards issued by the same card issuer, make the most of the benefits by choosing the credit card(s) that matches your spending pattern and lifestyle.

For instance, those spending a sizeable amount on travel linked expenses such as air tickets, hotel stays, etc may opt for travel credit cards while those spending a large amount on fuel for commuting can opt for fuel credit cards. Always opt for a credit card whose monetary equivalent of probable credit card benefits exceeds its annual/joining fee by a wide margin.

3. Helps manage cash flow through interest-free period

Interest-free period of a credit card refers to the period between the date of a credit card transaction and the due date of its repayment. This period can range anywhere between 18 and 55 days depending on the dates of credit card transactions. “The availability of interest-free period acts as zero cost finance for the credit card spends till their due date of repayment. To derive most of your interest-free period, try to time your big ticket credit card transactions in the initial days of the billing cycle of your credit card. Those with multiple credit cards with different due dates can maximise benefits by spreading out their card transactions amongst various cards in a manner ensuring the longest possible interest free period for big ticket spends,” says Arora.

Note that failing to repay credit card transactions by the due date can attract hefty interest cost in the form of finance charges @ 30-49% right from transaction date till the actual repayment. Additionally, non-repayment of the entire credit card bill would lead to the withdrawal of interest free period on fresh card transactions till the full repayment of that bill. Note that interest-free period is not applicable on ATM withdrawals made through credit cards.

4. Allows to finance purchases through credit card EMIs

Credit card users usually have an option to convert their entire credit card bill or a part of it into EMIs. The interest rate of such conversions are much lower than the finance charges whereas the tenure can range between 6 and 60 months. Thus, this option is especially helpful for those with restricted repayment capacity.

“Additionally, many credit card issuers also enter into tie-ups with manufacturers/ service providers and merchants to offer EMIs at either lower or no cost on their merchandise or services. Some merchant tie-ups even offer additional discounts and cash backs to the credit card holders on availing the no cost EMI option on select services and products,” informs Arora.

5. Instant credit disbursal in form of pre-approved loan against credit card

Credit card issuers provide pre-approved loan against credit cards to select card users having good repayment record and credit profile. While loans against credit cards are usually sanctioned against the available credit limit, some credit card issuers also offer an additional variant, wherein the loan is sanctioned over and above the credit limit.

The pre-approved nature of this loan option and non-requirement of documentation allow quick disbursal of the loan amount, usually within the same day of submitting the loan application. This makes it one of the best ways for dealing with financial emergencies and other monetary shortfalls.