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We often hear of credit cards leading their holders into debt traps. However, it is not credit cards per se, but financial indiscipline that leads users to incur steep penalties and finance charges, leading to debt traps. If used well, credit cards can be tools to build your credit profile and to save money.

In this piece, we look at how credit cards can help improve your finances if used wisely.

Building credit score: Transactions made through credit cards are similar to availing loans. Credit card issuers report credit card transactions to credit bureaus, which in turn use this information to calculate your credit score. However, unlike on loans, credit card users do not incur interest costs on transactions as long as they repay dues before the due date. This way, you can make the proper use of credit cards to build your credit score.

Sachin Vasudev, associate director and head credit cards, Paisabazaar.com, said, “Lenders usually consider a credit score of 750 and above as ‘good’. Hence, those having a higher credit score have higher chances of loan and credit card approval. Many lenders also offer preferential interest rates to applicants with a high credit score."

Finance spending through EMIs: Credit card issuers allow equated monthly instalment (EMI) conversion facility to card users for specific transactions exceeding the threshold limit or for the entire bill amount or a part of it. This option is beneficial for those unable to repay their total credit card bill by the due date. It can also be helpful for those unable to make essential big-ticket spending owing to lack of repayment capacity. The EMI conversion option usually comes with a loan tenure of six to 60 months, allowing cardholders to choose their loan tenure as per their repayment capacity.

Vasudev said, “Credit card issuers also collaborate with various manufacturers and merchants for providing EMI facilities at lower or no-interest costs on their services and merchandise. In the case of such no-cost EMIs, the merchant/service provider bears the entire interest cost component of the EMI facility. The card users have to repay the purchase price in EMIs and the GST cost incurred on the EMI’s interest component."

Saving through card benefits: Credit card issuers try to attract card users to transact more by offering reward points, discounts, vouchers, cash backs, etc., on transactions. One can make the most of such benefits by opting for cards whose reward points structure and benefits match their lifestyle and spending pattern the most.

Adhil Shetty, CEO, BankBazaar.com, said, “Credit cards offer rewards, cashbacks and points. This way, it allows the borrower to think deeply about their expenses and manage them to minimize costs and maximize rewards. For instance, you may earn a 5% cashback on utility bill payments via your credit card, and therefore this way, you can earn a small discount each time you pay your bills. This way, you may accumulate reward points that you can you use later to pay your bills."

Additionally, many credit cards offer multiple lifestyle benefits such as free lounge access and complimentary club memberships to users.

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