RAGS TO RICHES | Credit Cards Aren’t Scary!
Rags to Riches is a monthly dose of finance for creative professionals, freelancers, artists, heavily aided by stories, puns, memes and examples.
Written by Ragini Singh Khushwaha, founder of ArtNowThus and subject matter expert on the arts, media and content, cats, random factlets from around the world and productivity hacks.
With inputs from Sakina and Husein Merchant, Chartered Accountants who attempt to bring out their best selves by combining their professional skills and their love of being around and learning from other creators.
For many years of my salaried life, I resolutely refused a credit card. I was petrified that it would lead me down the road to debt and financial ruin, and there was no way I was taking that chance. Until a few years ago, when I got my first credit card.
It changed my life.
Well, not really. But it did get me to realise that credit cards aren’t really all that frightening. And honestly, once you know what you’re doing with it, it’s quite the tool to help snag some sweet deals (and to do other adult things like building a healthy credit score - which I will explain in a bit).
A credit card, like the name suggests, gives you a line of credit up to a certain amount for a certain period. It’s a loan that you promise to pay back at a fixed time each month. And since you’re very good at making sure the money goes back to your creditor, you get this loan interest free each month.
What a credit card is absolutely not however, and I cannot emphasise this enough - is more money in your bank account than you actually have!
Basically a credit card gives you more liquidity, temporarily. Obviously for certain cases, having a little extra liquidity is very helpful. If you have a salary cycle that doesn’t sync in with your expense cycle, it’s helpful to pay by credit card and use your salary to pay off the credit card bill in the month. But a lot of people who have jobs pay them regularly at the start of the month, still prefer to put most of their expenses on credit cards. And surprisingly, this is a pretty healthy money practice to have. Why, you ask? Paying by credit cards, over a debit card or any other form of digital payment, has some very strong advantages - not least of which is to improve your credit score.
What is a Credit Score?
To learn more about credit scores in India, click here.A credit score is a prediction of your credit behaviour. It’s what any financial body uses to ascertain how much credit to extend to you, depending on how good you are at paying your loans back on time. No surprise why using a credit card regularly and paying off the credit bills in time is a great way to improve this coveted credit score. A good credit score doesn’t only increase your chances of being able to take a loan when you might need it, it also reduces the down payments and interest rates on these loans. Essentially, your credit score shows the bank how reliable you are, and if they know they can trust you then they reward that faith by giving you better deals on your loan terms.
So that’s the serious reason a lot of people use credit cards.
The more fun one is that credit cards are famous for coming packed with a bunch of benefits. The benefits differ from card to card - some cards come with cashbacks or airport lounge access or fuel benefits, and even stuff like free movie tickets and Zomato orders.
Probably Relevant Side Note: I spent many years of my life nodding along knowledgeably without having the foggiest idea what cashback really meant. So for anyone else in my unenviable position, here you go - cashbacks are just simply a tiny portion of your money that you receive back when you make a purchase. You’re welcome.
The benefits vary but you can pick a suitable credit card that works best for you depending on your lifestyle. Spending through a credit card also gives you points each time you use the card. Again the points system varies from bank to bank but effectively, the more points you garner the more benefits you get the more free stuff you have. Yay!
Great, so now I’ve got you sold on using that credit card more often if you have one. But what if you don’t have a credit card yet? Whether you should or should not be looking to get a credit card, I leave up to you. But if you do decide to go in for a credit card, you’re probably wondering how you begin.
STEP ONE: Improving your Credit Score
That first step (like most other first steps) is the hardest and does unfortunately have a slight barrier to entry. Like I said, credit cards are a tool that gives you a short term loan. Any loan given to you by a financial institution will refer to your credit score in order to do so. So if for any reason your credit score does not qualify you for a card just yet, you need to spend some time bringing that score up in order to get there. Credit scores are impacted by anything that reflects frequent irregularity in your financial behaviour. That being the case, in order to improve your score you need to make sure you’re making payments on time - phone bills, insurance policy payments, online subscriptions. Any payment where the transaction is recorded should be on priority and be paid on time as far as possible.
Credit scores aren’t always low as a result of irregular financial behaviour though. Sometimes you may just not have a long enough financial history for it to reflect in your score. In either case you just have to be patient, keep doing the right things and wait for things to happen.
Probably Relevant Side Note: If you want to check your credit score, it’s the easiest thing to do online. I literally Googled ‘how do I check my credit score’, clicked the first SBI link, filled in some basic details and got the score delivered to my email account in seconds.
Probably Relevant Side Side Note: I realised later that SBI did take a small fee from me for sending me my score. Pffft. It’s 0.35p though, so negligible but good to know… I guess. Hina however used her banking app and they charged her Rs.200 for this, but she preferred doing this through her bank rather than a random online app. So pick what works for you.
STEP TWO: Apply for the Card
If your credit behaviour is healthy, your score will be good and eventually the bank you’re banking with will probably call you and straight-up offer you a credit card. If this hasn’t happened, you can go check with your bank directly and apply for the card.
CHECKLIST: Before your sign the dotted line
Before you’re ready to go forth and seize the world with your brand new credit card, there are a few things to keep in mind. While you’re obviously going to check the benefits you’re getting with the card you apply for, there are a few other things to check.
Credit cards levy an annual fee to you which varies from card to card and it’s important to understand these charges before you apply for the card.
It’s also important to know what your credit limit against the card is i.e. the amount you can borrow on the card. Whatever the limit is, you need to make sure that when you’re using your card you’re spending less than 70% of this amount. Hitting your credit limit frequently also affects your credit score, and as we know by now, that is not a good thing for us.
If you plan to use your credit card for transactions abroad, make sure you know what the charges on these are and preferably apply for a card with zero or low foreign transaction charges.
And lastly, as a general credit card rule of thumb - as far as possible never use your credit card for cash withdrawals. Not only do these obviously come at an additional charge, there’s also a per-day interest that gets tacked on to the amount that we would all generally like to avoid as much as we can.
And that’s it. Except it isn’t. The mama-cat in me can’t resist ending this article without one final note on credit card debt.
FINAL NOTE: Credit Card Debt
The reason credit cards feel scary is not entirely just ‘in our heads’. We’ve all heard horror stories of people racking up bills they can’t afford to pay back. This of course happens when you do not have the money to pay your credit bill in time. But where it compounds to being unmanageable debt is in the default fee and the interest rate levied thereafter on any overdue amount. I did mention that credit card payments were interest free, but this only for the period of the month. Once you’ve crossed your due date on payments, credit card companies will immediately start charging you an extremely high interest on any unpaid amount. Rates can go over 40% p.a. in some cases, so you can see how one unpaid bill can snowball to a much higher amount than just that overdue sum.
Probably Relevant Side Note: There is an option in your monthly credit card payments to pay the ‘minimum amount due’. While this will let you avoid the default fee, any unpaid amount leftover will be interest applicable. So it’s important to pay the entire bill every month.
At the risk of sounding like a broken record - once again, as long as you’re not using your credit card in lieu of money you do not have, you have nothing to worry about!
And that’s actually it.
Credit cards are a simple enough tool, and are very similar to a debit card with the simple exception of giving you more liquidity beyond your current bank account and some snazzy deals. You may still choose to not own a credit card, and that’s a valid choice. But don’t not own one because it’s scary - you now know that it totally isn’t.
Boo!
ENDNOTE AND DISCLAIMER
Rags to Riches is a monthly column published for the ArtNowThus Blog and Newsletter. Meant for creative professionals, freelancers, artists - anyone really who hasn’t yet quite figured it out and needs a place to start from scratch.
All Rags to Riches articles are put together with the help of experts, and heavily aided by stories, puns, memes and examples - this is a finance blog you will actually want to read and (hopefully) put to use in your personal finance lives.
We’d like to establish that while the principles outlined in this section should pertain to anyone, we’ve put this together with a focus on creative professionals and freelance workers. Also, while we do have Husein and Sakina consulting with us on this column and keeping us straight, we’re not financial advisors. This column is for informational and recreational purposes only and in no way meant to offer advice or recommendations.