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Credit cards: A great planning tool

There is only one condition however; using the card properly i.e. not abusing the card or its facilities.

Written by Kartik Jhaveri |
April 9, 2012 3:45:30 am

Having a credit card or a handful of cards is a superb idea. It is a great financial planning tool,provides its user a host of benefits and the best part of the deal is that it comes at zero cost. There is only one condition however; using the card properly i.e. not abusing the card or its facilities. Life can then be really beautiful with the facility of having a couple of credit cards. Few of us understand the potential and power of a credit card. The rest of us are mortally scared of this demon which is largely due to bad previous experiences,which would have occured out of sheer ignorance. We then blame the card and card company and believe that this is best avoided.

Cashflow & Budgeting

1.Tracking mechanism: Everything is visible to you. What you spend,when,how much,with what frequency etc. Some companies even go to the length of providing you tools and/or physical statements to analyse your expenditure pattern monthly,quarterly etc. Here you are saved the worry of “how did the money in the bank get over so soon”. You know exactly where you spent it. Set alerts when you reach a credit limit. This way you can control spends and manage budgets.

2. Live cashless: All purchases you make become virtually cashless. Most goods and services we buy these days,whether online or in person accept cards. Payments via a card is pretty normal and this facility allows you to go around anywhere with say Rs 1,000 in your pocket.

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3. Protection: Even if you lose your card,simply call the card company and block your card from any misuse. Ensure that the card company numbers are stored in your cell phone. That takes care of security.

Financial Planning

1. Get two Visa cards and one Mastercard at the very least. If you like you can include a card from American Express as well. Sometimes it may happen that a card does not work so you have options and hence this is important. Also,if you are making a large purchase multiple cards surely help.

2. It is good to have a combined credit limit of about R 1-2 lakh with all your cards put together.

3. It is important that you have one card with a pretty low credit limit say R 10,000 so that you can use this for online transactions. Some banks give you the facility of creating a virtual card. It is just like any other card but it is not physical. You can see the image in the website of your bank. You can decide the credit limit and reset it on the fly. This is so far the best way to transact for online

purchases.

4. Be a smart shopper: Pay for everything you buy via the card and collect loyalty points. You may even consider setting up payments to your utility bills with pre-set limits. By doing so over time you collect hundreds of points which you can redeem for vouchers to have a shopping treat. This is also a great way of augmenting your shopping budgets and reducing a sizeable percentage of your annual expenditure. Take full advantage of all the extras and freebies; be it free insurance,discount coupons,lounge access and the list is endless. This is all worth good value and best part is that it is all free!

5. Credit cards are available for free generally speaking. Hence paying a fee to get a card is not such a good idea.

Contingency Planning

1. Here is one of the most interesting ways to do contingency planning. Often when a financial plan is created for a family the planner runs out of money to provide for emergencies and contingencies.

2. A combined credit limit of say R1-2 lakh can pretty much take care of most emergencies while you try and organise money for that hospital admission or similar events.

Be Cautious

1. Spend on card only what you can afford and without the EMI facility. Credit card is not a licence to spend but a facility of using plastic cash.

2. Keep an alert of billing dates and make sure you pay on time. Try never to roll over your payments. This will cost you anywhere in the range of 35-40 per cent per annum interest rate. The rate will also apply if you withdraw cash from ATMs using your credit card,which is best avoided.

3. Do not buy services like insurance policy or anything else offered over the phone especially if the transaction requires detailed understanding of the service in question.

— Author is Director, Transcend Consulting

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