You might have heard that Credit cards can add a financial debt to your finances. Well, that’s true if you don’t know how to use it in the first place.
In fact, credit cards can work as a mode of passive income and help you in multiple ways if used correctly.
Quoting Elizabeth Warren,
“My advice is to treat [credit cards] like what they are: little plastic grenades that must be handled very carefully.”
You must be wondering what could be the possible ways that anybody could go wrong with a credit card? Why are you advised to handle it with such responsibility? And how can it lead you to a huge financial debt?
In this post, we will discuss all the possible reasons for credit cards as an asset or liability, and the right ways to use them.
But to answer this question in short:
Credit cards are a liability and not an asset, as the money on the card is not yours and this credit line does not increase your net worth.
How is your credit card potentially a liability?
Minimum Amount Due Trap – Did you know that you pay interest rates as high as 35-40% yearly for a credit card? Yes, that’s correct. If you do not pay your credit card payment in full amount or are paying just the minimum amount due then you might be paying these interest rates.
Not paying credit card full payments before the due date will lead to a massive amount of interest on the amount that you have not paid which will keep piling up. This eventually leads you into a financial trap.
Easily overused – It’s easy to get swayed away with the money that you have on your credit card in addition to your bank account balance. You might be tempted to put all your expenses on the credit card and spend your bank account balance as well without thinking about how you’ll be repaying the credit next month.
High-Interest Rates – If you are not paying your dues by your bill date, it will take that amount forward and put interest on it. This interest is as high as 3% per month, leading to approx 36% per annum.
How to use credit cards as an asset?
If you are meticulously using your credit card and are paying 100% payment every month before the due date, you can use it to your advantage as you are getting an interest-free loan for a month.
Paying full payment monthly will help you increase your credit score and also get bonus rewards for spending.
You can even invest in small-term investment plans and earn some extra bucks through that too. In fact, most credit cards now allow you to make payments without generating interest for a while.
If you can take advantage of that and pay in time, you can potentially save 36% interest every year on your cards.
Credit cards play a vital role in maintaining your credit score. People are often being declined loans by the banks just on the basis of their credit scores. But If you are paying your credit card full payments on time, It will help you increase your credit score.
The analogy of a credit score is simple.
On a scale of 0 to 850, your credit score is evaluated. The better you are with your repayments and utilisation of credit, the higher your score goes.
Therefore a credit score plays an important role in financial life. The average credit range used is as follows:
- Excellent – 800 to 850
- Very Good – 740 to 799
- Good – 670 to 739
- Fair – 580 to 669
- Poor – 300 to 579
If your score is more than 750, then you are very creditworthy. This will help you get a loan for your car, home, education, etc. very easily even at low-interest rates from a government bank. Even while increasing your credit card limit or changing interest rates, banks often look at your credit score.
How to increase your credit score?
Increasing your credit score can potentially unlock newer opportunities for you. An increased credit score makes you seem very disciplined and trustworthy with your money, and can even help decrease your interest rates.
To increase your credit score, you can try the following steps:
- Six months of on-time full monthly payments will help you see a noticeable score difference
- Don’t close a credit card account if you aren’t using it. It will do no harm. But showing a minimal credit utilisation helps you in increasing your credit score.
- Increase your credit limit on your credit card but don’t use the entire amount till the limit is provided. It is crucial that you don’t have the extra credit provided to maintain a lower credit utilisation.
To be precise, a credit score will have an important role in your finances in the future. It’s just right to say that maintaining it will help you save a lot of money too.
Using your credit card will accrue you rewards/points for purchases such as shopping, travel, bill pay, etc.
Enough of these points will eventually give you coupons, free vouchers, products, and discounts, something that credit cards are popular with.
How to earn reward points on your card?
- You can increase the use of your credit card. This might include grocery shopping, buying jewellery, online shopping, and even paying at restaurants.
- Use your credit card to pay your bills like utility payments every month to earn extra points.
- Use your card to travel, from booking flights to booking hotels. Using your credit cards on travels will help you grow your points even faster.
- Remember to carry your Credit Card whenever you travel internationally to make the best of the bonus rewards provided on international travels.
Benefits of Reward Points from Credit Cards
- Rewards on every transaction: Except for transactions on things like gold, fees, and fuel, you can earn reward points on mostly all the transactions from credit cards
- Accelerated rewards: These are reward points that you earn from brands that have co-branded with credit card companies to provide you with more benefits/rewards.
- Milestone Rewards: If you reach a certain milestone through your credit card transactions, you will be provided with a huge bundle of reward points. These are reward bonuses credit card companies give to their users on achieving these milestones.
- Exciting rewards: After getting a certain number of reward points you also get products from various categories of items listed by the company. These products might include electronics, home appliances, apparel, etc. You might also be eligible to redeem these points for cash.
The right way to use your credit card
Keeping a credit card as an asset or liability is completely up to you.
Using your credit card the right way, for the right reasons, with enough confidence to pay everything back is a healthy practice.
On the other hand, if not handled with caution, credit cards can also lead you to traps with interest rates that are quite bizarre.
The right way to use a credit card is to start by getting a zero yearly charge. Put your majority of expenses on the credit card (to earn a huge number of reward points) but only if you have the money to pay them. Most importantly, always make your payments in full amount and not in part or minimum amount due methods.