Why I use credit cards for everything

(Wherever it's accepted)

Hi!

Credit cards have a conflicting reputation especially in the personal finance space. Some call it the principal cause of financial ruin, and others an amazing instrument to be rewarded for spending. While both are true, I consider my credit cards important for my personal finance.

Why I use credit cards over cash

1. Convenience

Credit cards are accepted in most stores and restaurants today. I can now replace carrying stacks of cash with just one piece of plastic for my spending. Keeping less cash on me also makes me less of a target when I open my wallet.

2. Buffer for any temporary cash crunch

Like I discussed in my other posts on emergency fund and contingency fund, I use credit cards as a buffer for any delays in accessing my money. I have 15 - 45 days to repay this amount, and in most scenarios I would be able to withdraw money from those funds to pay my credit cards bills.

3. Builds credit history

Whenever I pay my credit card bill, the bank reports my payment to the credit bureaus. Regular and timely payment increases trust in my repayment ability, so my credit score increases. That will help me in the future through faster approval and favorable interest rates when I may need to take a loan.

4. Rewards points

New credit cards usually have one-time bonuses when we get them or spend a certain amount with a stipulated time. I put all my transactions on my credit card, so the threshold will be hit pretty easily. For regular transactions as well, I get rewarded for every transaction. I can then redeem them for cashback, air tickets, gift cards, etc.

5. Products have credit card fee priced in

Merchants pay transaction fees when we swipe our credit cards. They pass this on to us as a mark up on a product / service’s price. If I pay using any other method like cash or debit card, I’m leaving money on the table through unearned cashback or reward points. Why would I do that?

6. Security from fraud

If there’s any unauthorized transaction on my credit card, I need to just report it to the bank and they’ll take care of the investigation and recovery of the money. It’s their money after all. I have zero liability.

This doesn’t work for debit cards / UPI. I can report unauthorized transactions, but it’s my money on hold while the bank investigates. The money may be returned eventually, but I still need to pay my bills on time. This may open up a need to withdraw from other accounts to compensate for expenses.

7. All the benefits with (little to) no money

When I use my card, I am going to spend that amount anyway. I might as well get rewarded for it. I also get to pay that amount after 15-45 days for free as long as I pay the whole amount. That money can stay in my bank account / liquid fund and earn interest till I need to pay the bill.

Credit cards also keep my bank transactions clean, without a mess of small transactions. I can then keep a look out for any fraud easily.

How I use my credit card

1. Pay bills on time

If I don’t pay the bill on time, interest starts accumulating for the pending balance. I will giving away my rewards with the extra interest, so I choose to pay it off in full each month.

Late payments also affect the credit score, and I don’t want a higher interest for loans in the future.

2. Don’t increase spending

What I was paying before with cash, I just replaced that through a credit card. I found cards which reward my existing spending pattern, which maximizes my earnings. I don’t do it the other way round, where I spend just to earn rewards.

3. Find a credit card with high limit

Luckily I was eligible for a large credit card limit, which is considerable larger than my existing monthly expenses. I can use this for any high value transaction without looking to shift my money around to make up for any shortfall. This also works great during any emergency where I need to make a large payment without worrying about my investment withdrawals.

4. Don’t convert purchases to EMIs

Unless absolutely necessary, I don’t intend to convert any of my purchases to EMIs. This defeats the purpose of squeezing the most out of the card without paying the bank.

If I need to make it into an EMI, I may not have been capable to afford it in the first place.

5. DO NOT withdraw cash using credit card

Cash advances carry really high interest rates, and their interest accrues without any grace period. The interest can be as high as 4% per month. That’s a big no-no for me.

6. Have multiple credit cards

I have two credit cards, one as a back up in case the other one doesn’t work. We never know, that might happen during an emergency.

Wrapping up

Credit cards are great when we know how to use it to our advantage. Just like a sharp knife, its utility depends on who uses it and how. Use it to chop veggies, not fingers.