How to make Credit Card your ally, not an enemy

You would hear people spewing out fowl words at Credit Cards and on their companies calling them “an illusionary money offered to fool people to get them into big debt traps”. Albeit, not everything said so about it is true. 

A very general notion and knowledge about the business model or source of revenue for these Credit Cards so far known to people is the humongous interest earned on late payments, joining fees etc. 
But credit cards are much more than just these fees, their revenue model has many other sources than what we haven’t acknowledged yet in general. 

My story 

I started using Credit Cards 3 years ago with my first being from SBI. The card had a good value for money from the earned reward points. For the last few years we might have been observing a spike in Credit Card usage and offers from companies like HDFC, ICICI, SBI etc. 

This surely made me think about why not have all the credit cards and use them as and when offers come. Searching for all the probable Credit Cards I could get as applicable with my Credit Score I started applying for as many as I could (the beneficial ones) and there was a time when I had 8 credit cards in my wallet. 

It took me time to realise that Credit Cards create an illusion of excess Cash in Hand whereas it’s just a borrowed money which people take time to comprehend. If at all we try to exceed that limit than our actual earning then that’s gonna be beginning to the end of the amount of cash you can withdraw from your salary account. After having several days of headache on what kind of trap I got myself into I later realised that Credit Cards could actually be good IF MANAGED WELL. 

Let me take you through some facts that will clear your understanding of Credit Cards better and finally how to manage it: 

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Credit Cards (CC) are next to Discount Coupons 

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● Do you go through websites like CouponDunia, GrabOn etc. which provide you coupon offers to make your purchases on e-commerce websites? 

● Well their working model is too trivial to comprehend as of today’s market culture and this is how it happens: A coupon providing company’s operation team calls up an e-commerce or a some product selling company, promises to provide a platform with a greater footfall and in return asks the e-commerce to give some percentage of their selling price to the coupon company, part of which goes to the actual customer who utilizes it for discount. 

● CCs work the same way but the difference lies in the strong and stable operations team backed by a huge merchant network and a good source of financing(CC banks). 

● This is one of the major sources of revenue for them. A CC company like SBI, HDFC or ICICI have a huge network with product merchants and e-commerce companies, and that is how you get to see offers from these CC companies more often on e-commerce websites like “10% off with sbi / icici”. These price slices often come in other forms like Reward Points or Cash Backs. 

● So, a good suggestion when scrolling through choice of credit cards would be to buy a CC with a good network and merchant connections. An easy way to understand is by checking which one you get to see more frequently in e-commerce websites providing you offers. 

There is no other option 

● One of the achievements that the present govt tried to implement fully with demonetisation was a cashless society and it is the future of our economy. For a long time VISA and MASTER-CARD had been dominating as the only payment gateways in india. 
Payment gateways are gateways that bridge the transactions of unlike merchants for eg. if you want to send some money from SBI to ICICI then payment gateways do the job by charging a minimal fee. 

● Our present govt tried to remove this dominance by creating an indigenous payment gateway Rupay. Present day credit cards can be seen with this logo too: 

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● Now you must have understood one of the big reasons behind demonetisation. 

● In future, 99% of our payments are going to take place via some cashless ways and CCs are one of the ways. As of today, we prefer payment on shopping or dining via Debit or Credit Cards given how they allure us with their loyalty reward bonuses. 

● Although both the kinds charge equally for any transaction be it online or offline, but if you have to choose between the two then go for Credit cards and it comes with reasons. 

● First, CC companies prefer you to use CCs over Debit Cards as they have more merchant connections with it. Credit Cards often come with a considerable joining fee and late fees which add to their sources of revenue. 

● But if taken care of timely payment and yearly expenditure to avoid annual fee then Credit Cards will give you better value for money than Debit cards in form of Reward Points. So basically, greater the merchant connection, higher chances of you accumulating the reward points. 

Strategy behind joining fee 

● Joining fee is one of the initial service fees every CC company takes from their users and it comes with a lot of background maths in order to get maximum out of a user’s pocket. 

● A Credit Card is customized for users as per their lifestyle.. If you are a movie person then a card which provides you free movie vouchers is provided to you, if you are a frequent flyer then a custom card which can get you greater reward points (or Miles) on booking flight tickets is provided to you. 

● Seeing your lifestyle CC make merchant connections with all those shops you would take this card to and swipe, for eg. movie custom CC would be benefitted from swiping at popcorn stalls in PVR who have already signed up with profit sharing with CC companies. 

● The same applies to frequent flyer CC used at booking sites who too sign up for profit sharing. This is how they would tailor a perfect credit card for you to earn the maximum revenue out of your pocket. 

● So, coming to joining fee, if you are a high earning guy then probably a tailored CC would come with huge joining fee and a statement that “if you make this much expenditure in the next annual year, this joining fee would be remitted in the next annual bill. 

● The joining fee is calculated in such a way that a user would try to make the required expenditure through the year in order to avoid it and eventually ends up in making the company earn revenue from all those merchants wherever you swiped your card at. 

● This joining fee becomes negligible in front of revenue earned by the CC company who later remit in upcoming annual billing amount. 

Managing expenditures and avoiding debt trap 

● A good way to manage expenditure using CC is to only spend a fraction of the Credit limit which makes the enough cash available in your hands for the transactions which have no other way but to pay via cash. 

● This in hand cash amount and the fraction of the Credit limit you like to spend should not exceed your monthly salary. 

● If you have fallen into debt trap by over-using your CCs and have ended up paying hefy late payment fee then there are 2 ways to tackle it: 

1. Always have credit cards, you can recharge one by another and convert that rechange amount to EMI as per your monthly savings 
2. Take a personal loan and charge your CC with it to avoid hefty rate of interest charged by CC companies.

So finally to summarize here are the major factors that needs to be considered. 

  1. Joining fee strategy. 
  2. Rupay gateway.
  3. CC replace coupons. 
  4. Single card for all expenditures.
  5. Always take a credit card with a huge merchant network.
  6. Convenience fee and cashless society(a way of taxation), debit or credit.
  7. How to manage spending from CC, overcharging a CC, Credit card is better than taking personal loans. 
So before you throw away your credit cards due to some misunderstandings as you could not utilize it to your optimum benefits please do consider reading this article. Also,if you have any other suggestions to add up please feel free to share your thoughts in the comment box below. 

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