Do You Really Need A Credit Card?

The short answer: Not really.

But the long-winded answer is that a credit card is a (very sharp) double-edged sword. If you’re careful with it, it’s a fantastic financial tool that can help you save money in the long run. But if you’re careless, you’ll find yourself drowning in debt.

So when is it useful? And when does it get dangerous? Let me break it down for you:

Useful: It Helps You Build A Credit Score

Credit scores are a public barometer or measure of your financial health. It conveys that you are an individual with stable finances and can be trusted with money. The scores are usually marked between 300 to 900, so the higher your credit score, the better. A high credit score helps you get lower, more competitive interest rates on loans, it makes you eligible for larger loan amounts and for additional features like instant disbursement and paperless processing.

Credit cards are the easiest way to build and improve your credit score. Every time you swipe your credit card and pay the bill back in full, you build and strengthen your credit score. The longer you use a credit card, the stronger your score becomes. So if you’re looking to borrow in a few years – whether it’s for a home, higher education or even to start a business, you should be building your credit score. And a credit card is a great place to start.

Dangerous: It Can Push You Down A Debt Spiral

Credit cards are not free money. While they do give you the breathing space to postpone payments, they can punish you for delays. When you don’t pay in full – whether you pay only the minimum amount or skip payment altogether, not only will your credit score take a solid ding, but you’ll also be charged interest – which can range between 18% to 36% per annum, late fees and taxes on both. The ‘minimum due’ is especially sneaky and can make you feel like you’ve got things under control only to drown you a few months later. Credit card debt is among the most expensive forms of debt out there, so it’s vital that you don’t bite off more than you can chew.

Useful: You Can Earn Rewards

When you opt for a premium credit card (where you’ll have to pay an annual fee for the credit card), you can earn reward points on your spends. These points can be used for hotel stays, airline miles and cashback. If you’re just starting out with credit cards, it’s recommended that you get used to the billing cycle of your free credit card before you upgrade to a premium card. I like using a premium credit card for collecting travel miles/hotel points. My favourite card for collecting miles is the American Express Platinum card. It costs ~Rs. 5000 annually but gives immense value in terms of conversion into Marriott points and Avios. [PS: If you’re in the market for a travel rewards card, you can apply for it using my referral link. You’ll get your first year’s membership fee waived and 2000 bonus points if you spend Rs. 5000 within the first 90 days.]

Dangerous: It Can Increase Your Spending

One of the side effects of having a credit card is that you don’t see the impact of your spending on your bank balance immediately, so there is a false sense of security that you might feel. This, in turn, can encourage you to spend more. In my initial days of points collecting, I found myself spending unnecessarily, ‘for the points’. The solution is to really be in touch with your credit card’s balance so you know you’re not overstepping your limits. That way, I find having credit cards attached to my bank account (ie, credit cards issued by the same bank I have an account in) easier to keep track of. I know a lot of us dislike being in touch with our bank accounts, but the more comfortable we get with our statements, the more control we’ll have of our finances.

TL;DR: Credit Cards Are A Double-Edged Sword. Don’t Get One If You’re Still Figuring Out Your Finances

You know your spending habits best. If you think having a credit card will push you further into spending, don’t get one. If you’re in control, regular with your bills and know you can be on top of payments, a credit card can help you make the best of your existing expenses. Tread wisely 🙂