The right way (and the wrong way) to using credit cards

The quest to accumulate miles at the lowest possible cost is a never-ending one. Credit cards are usually our best resort to help us earn a fair number of airline miles without the pain of having to actually travel all those miles. And we've written a fair bit on this blog about credit card spending, promotions, etc.

However, one needs to be careful about spending excessively on credit cards. Uncontrolled spends can lead to huge amounts of debt, spiralling interest, unwanted calls from banks and visits from their agents (if you know what I mean), what have you. And much as we are all rational people, we can sometimes get carried away by the power of credit cards. So I thought I'd write a bit about credit card spending and doing it safely.

Much as personal financial planning "experts" may try and convince us otherwise, credit cards are pretty good, and generally rather useful. 

• You don't need to carry large amounts of cash around. 
• Transacting is pretty secure, especially with the chip-and-pin system that India-issued credit cards require. Card companies even call you to verify high-value or other unusual transactions as well, to protect you (and them, of course!).
• You get a defined credit period to pay off your bills.
• For transactions above a certain value, some credit card companies provide an EMI facility (for a fee) which may not otherwise be offered by the merchant.
• Most credit cards are part of a loyalty program, which offers rewards (points, miles, cash-backs, etc), which result in additional value to the customer.
• Credit cards can provide loss protection, which is something even debit cards do not. With a debit card, once the charge is swiped from your account, that's the end of it.
• Merchants, banks and the card issuers themselves often offer promotions for using specific credit cards, which can be useful. 
• Certain high-end credit cards provide other affiliated services (such as travel, concierge, etc).
• Correct use of credit cards can actually help improve your credit score, making it easier to conclude other financial transactions later.

Much of this calls for financial self-discipline and using credit cards the right way. So what are the signs of using cards the wrong way?

• Not paying your credit cards on time and in full can result in falling into a debt trap, which can be quite difficult to get out of. A former colleague had this happen to her, because she spent far in excess of her income. She ended up with a personal loan in excess of Rs 1.5 million...back in the early 2000s!
• Regularly spending more than you can afford. Same example as above!
• Ignoring the fine print. Fees, charges, interest and penalties can add up to a whopping large amount.
• Not monitoring your credit card spends and adjusting your spending pattern accordingly.
• Spending on the credit card with the sole or main intention of rewards. Those toasters are cheaper than you think, if you buy them for cash. Really.
• Routinely spending on stuff you don't need.
• Using credit cards, as opposed to ATM or debit cards, for cash advances. These carry huge interest costs, in addition to transaction fees.
• Choosing a card for the wrong reasons. Particularly introductory rates.

These are just some examples. 

If you're in India, you should register with Credit Information Bureau (India) Limited - or CIBIL - and periodically check your credit score. CIBIL assigns a score between 300 and 900, based on information supplied to it by banks, financial institutions (FIs), etc. These are further listed by each loan, credit card, other financial facility taken, guarantees and securities given, etc. 

Also, while you cannot change your score online, you have opportunity to dispute any incorrect statements that banks or FIs may have reported about you.

CIBIL used to have a rather cumbersome process, where you paid online, and later sent them scanned copies of your ID proof via email, and they'd snail-mail you back your credit report. Things have changed in the last 2-3 years. Now, you can pretty much get your credit report online, instantly. The service costs Rs 550 a year (not to mention the points / miles you'd earn when you pay using a credit card!), and I personally recommend getting your credit report update at least once a year.

Conclusion

In today's day and age, it is essential to be absolutely careful with one's finances. I've seen enough people crumble because of poor spend patterns and bad debt management. On the other hand, spending smartly using credit cards can be quite rewarding in terms of the associated benefits.

Do leave your thoughts in the comments section below, on what else you think can be instances of good and bad credit card usage.