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Business News/ Money / Personal Finance/  Should you use credit cards to make big purchases?
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Should you use credit cards to make big purchases?

Many millennials take credit cards to look cool while GenZ relies on instant gratification. There are some who will genuinely take credit cards to benefit from cashback offers and reward points that lower the overall cost of their purchases.

The decision to use credit cards for large purchases depends on myriad reasons. (AP)Premium
The decision to use credit cards for large purchases depends on myriad reasons. (AP)

Many people are opting for increased credit card limits, thus, highlighting the intent of more people to shop using their credit cards. A higher credit card limit allows one to purchase more using their cards or opt for large purchases when required.

Whether you ought to utilize a credit card for substantial expenses depends on your specific situation and financial condition. Here are several aspects to contemplate:

Repayment of credit card balance

Do you possess the capability to completely clear the balance on your credit card by the specified due date? This stands as a paramount factor to contemplate before opting to employ your credit card for significant expenditures. In the event that you are unable to settle the entire balance, interest charges will be imposed, and these can swiftly accumulate. Such a scenario could lead to debt complications and detrimentally impact your credit score.

In situations where you're uncertain about your capacity to settle the entire credit card balance, it's advisable to exercise caution and abstain from employing your credit card for substantial purchases. There exist alternative methods to finance significant expenses, such as securing a personal loan, borrowing against your mutual fund investments, or even redeeming profits from your equity funds. Moreover, these options might offer lower interest rates and more adaptable repayment terms compared to credit cards.

Your card’s APR matters

The Annual Percentage Rate (APR) signifies the annual interest rate charged by a credit card issuer for outstanding balances. It's depicted as a percentage and illustrates the interest you'll owe each year if your balance isn't fully repaid monthly.

Picking a credit card entails giving significant thought to the APR. Opting for a lower APR can lead to substantial savings in interest expenses over the long haul. Hence, dedicating time to compare diverse cards to find one with a low APR is a prudent move. However, it's essential to recognize that not all credit cards share the same APR structure. While some possess variable APRs that can fluctuate over time, others have fixed APRs, maintaining a constant rate throughout the card's duration.

When assessing credit card options, make sure to evaluate the APR along with other variables like annual fees, rewards programs, and penalties for late payments. Additionally, your individual credit score should be taken into account as it influences the offered APR.

Utility of rewards offered

Numerous credit cards extend rewards to their cardholders, often taking the form of cashback, points, or miles. Among these, cashback rewards stand out as particularly significant. They represent the most prevalent category of credit card rewards, allowing users to regain a percentage of their expenditures in cash. For instance, a card granting five per cent cashback on fuel purchases would reimburse you Rs 5 for every Rs 100 spent on gas.

Another favoured genre of credit card rewards is points rewards. These points can be exchanged for an array of items such as travel, merchandise, or gift cards. The value of points is subject to variation based on the specific card and chosen redemption avenue.

Miles rewards, typically associated with travel credit cards, remain prominent. These miles can be traded for flights, lodgings, or other travel-related costs. As with points, the worth of miles hinges on the card's attributes and the selected redemption method.

When embarking on the selection of a reward-laden credit card, it becomes imperative to factor in your spending habits and the type of rewards that would best suit your needs. A frequent traveller might find a travel rewards card to be a fitting choice, while those inclined towards economizing on everyday expenses could lean towards a cashback card.

Delving into the details is crucial when dealing with rewards programs. Certain cards might impose limitations on how rewards are earned or redeemed. For instance, particular cards might exclusively provide cash back on specific types of transactions, or they might impose monthly caps on point accumulation.

By acquainting yourself with the diverse array of credit card rewards and meticulously reviewing the terms and conditions, you can aptly select a card tailored to offer rewards that align with your preferences.

When in the process of selecting a rewards-based credit card, it's important to take into account the following additional factors:

  • Redemption process: Assess the simplicity of redeeming your rewards. Are there waiting periods involved before redemption is possible? Are there any constraints dictating how you can utilize your rewards?
  • Expiry date: Familiarize yourself with the expiration dates of your rewards. To prevent forfeiture, ensure you redeem them before they lapse.
  • Welcome bonus: Many credit cards extend a welcome bonus upon card registration. This might manifest as a lump sum of cash back, points, or miles, or even a statement credit.

By thoughtfully considering these elements, you can opt for a rewards-centred credit card that perfectly aligns with your preferences and ensures practical utilization.

Availability of benefits on the card

The precise advantages offered by a credit card will differ depending on the specific card in question. To comprehensively grasp the benefits available and their mechanics, delving into the finer details is crucial.

When in the process of selecting a benefits-rich credit card, it becomes imperative to factor in your requirements and identify the kinds of benefits that would hold the most significance for you. For frequent travellers, travel insurance could prove to be a valuable inclusion, while those who often rely on extended warranties might prioritize that particular benefit.

By gaining a comprehensive understanding of the diverse spectrum of credit card benefits and meticulously reviewing the terms and conditions, you can aptly choose a card that aligns its benefits with your specific needs.

Certain credit cards provide supplementary advantages, which encompass:

  • Extended warranties: This perk elongates the manufacturer's warranty on eligible purchases. For instance, if you procure a television with a one-year warranty and your credit card boasts an extended warranty benefit, your coverage could extend up to two years.
  • Travel insurance: This offering aids in mitigating costs arising from travel setbacks, cancellations, or medical emergencies.
  • Purchase protection: This feature provides coverage if an item you purchase becomes lost, stolen, or damaged within a predefined timeframe.
  • No foreign transaction fees: This provision can result in savings when using your credit card for international transactions.
  • Airport lounge access: This benefit grants entry to airport lounges, which typically offer amenities such as complimentary food, beverages, and Wi-Fi.

When in the process of selecting a benefits-rich credit card, it's important to take into account these additional factors:

  • Cost of annual fees: Some benefits-laden credit cards come with an annual fee, while others do not. It's vital to include the annual fee's cost in your card comparisons.
  • Benefits, terms, and conditions: Scrutinize the fine print to comprehend the mechanics of the benefits and any associated limitations. For instance, specific travel insurance policies might exclude coverage for particular types of travel, like cruises or adventure trips.
  • Accessibility of benefits: Certain benefits, like airport lounge access, might only be accessible to cardholders who meet specific criteria, such as maintaining a particular credit score or spending a designated amount on the card annually.

Not all credit cards offer benefits that come with annual fees. Some cards incorporate benefits as a means of attracting customers, while others implement an annual fee to offset the cost of providing these perks.

By thoughtfully weighing these aspects, you can select a credit card with benefits that perfectly match your needs and align with your practical usage. You may also reject the idea of taking a credit card if you are not a frequent shopper or flier.

There is no harm in using your cards to make large purchases provided it eases the buying process and ensures enough reward points and cashback offers for you to benefit from. Banking on credit cards recklessly without realising its benefits and understanding its impact on your finances can hamper your investment goals while also impeding your financial journey in the long run.

Should you pay minimum charges on credit cards?
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Should you pay minimum charges on credit cards?

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Published: 25 Aug 2023, 01:49 PM IST
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