Navigating the maze that is personal finance

Friday, 30 September 2016

You can actually earn using credit cards - here's how

 
We Indians love our credit cards. According to one report India had 24.5M credit cards in March 2016.  Credit cards have made life easier but carry high interest rates, anywhere between 12-18% per annum depending on the card you have. However, if used judiciously, credit cards can actually help you save money.

Let me show you how.


Earn interest

When you are paying for your expenses through your card you are not settling the transaction. That happens only when you are paying the bill on your card at the end of the month. The money which you would have otherwise spent earns that extra interest for those few days. Though the amount could be small but it should not be forgotten that every drop contributes to the ocean.

Let's say you bought grocery for Rs.5000 on 1st of the month in cash. If you use credit card this would earn you Rs.25 @6% as interest (just by keeping it in your bank account) by end of the month which would be 300 rupees for the whole year. Sounds less, doesn’t it. For an expenditure of Rs. 50,000 per month you would be saving close to Rs.3000 in a year. It's the small amounts we save that matter in the long run.

 

Points earned

So not only do you earn extra interest you can actually turn your expenditure into earning. Different banks offer different perks for using their cards. Points are earned for money spent through the card, which can then be redeemed for a discount on your air fare or for free fuel or as simply as in a restaurant on a night out or getting cash back.

Let’s say that your bank rewards you with 1% cash back on every purchase. Again considering an expenditure of Rs. 50,000 per month, you would save Rs. 500 or Rs. 6000 per year.

If your expenditure is substantial you could actually sign up for 2-3 cards and use each at place where you get more reward points for doing so. Like use one at a petrol pump where it gives you more points and other which has partnered with an airline, so every time you book tickets you earn more miles. This way you can maximize the points earned which then translates into more savings.

However, all this would make sense only if you are paying you dues on time i.e. paying your credit card bill at the end of each billing cycle. Otherwise the interest that you have to pay on you unsettled amount offsets the advantage of points earned.

In conclusion

I have just shown you how by using your card judiciously, buying only what you want and clearing your credit card bills in toto when they land in your mailbox at the end of the month, you can actually save money (to the tune of Rs. 9000 per annum considering an expenditure of Rs. 50,000 per month which you would spend anyway). This might seem less, but remember you will have to invest Rs.  100,000 for a period of one year in a fixed deposit to get that kind of return.


P.S. given below are some examples of what rewards are offered by banks on their credit cards.

https://www.online.citibank.co.in/portal/newgen/cards/rewards/citi-rewards-card.htm

https://www.icicibank.com/Personal-Banking/rewards/index.page

https://www.sbicard.com/en/personal/rewards.page

https://www.sc.com/in/credit-cards/platinum-rewards.html

http://www.hsbc.co.in/1/2/personal/credit-cards/rewards-programme

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