Is having a credit card really important?

Credit cards (or plastic money as we know it today) have been around for over half a century, and have only grown steadily since. With the sheer convenience they offer, cards have gained popularity worldwide. There are variants among cards that include credit cards, charge cards and debit cards. Let us take a closer look at credit cards and why they have assumed a fair amount of significance in the lives of a large segment of the urbanized population the world over.

Basic credit card usage guidelines

Think about it – do you really require that additional credit? Be honest with yourself, and if the answer is no, refrain from applying for a credit card. Get one only if you need it, and plan on using it.

There are several credit cards out there – shop around and compare. Pick the one that best suits your needs. For example, if your spends on fuel are regular, consider getting a card that offers you additional benefits (such as cash back) on fuel spends.

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Have any old, ongoing accounts? Don’t close them, as any ‘good’ old credit on your credit report shows you in a favourable light for a lender even in the future. A card that has been used judiciously and well managed in terms of timely payments shows that you can use credit responsibly.

Don’t make unnecessary credit card application, even if the offers sound tempting. Every time you apply for credit card, the card issuer makes an enquiry against your credit report. Each such ‘hit’ can bring down your score, albeit temporarily. Hence make sure your card applications are not indiscriminate and wind up doing you more harm than good.

Having a high or good credit score is vital to your financial fitness, and a credit card can be a double-edge sword. With a high score, you are more likely to use credit responsibly and make your payments on time. Depending on how you use your credit cards, they can either make or break you.

Is having a credit card beneficial?

In general, having a credit card is good for your credit score. This is because financial institutions can gauge how well you can handle credit, if you have a balanced mix of both unsecured products (such as cards) in your portfolio, together with secured loan products such as housing or auto loans.

Remember though the key to success here is to make card payments on time. Ideally, do ensure that you make payments in full, as carrying over a balance attracts heavy rates of interest, sometimes as high as 35-40% per annum. Further, it can become a debt trap for those who are not cautious enough – with one rolled over payment, it is easy to lose track of your spending versus the disposable income you have at hand to repay the debt.

For first time users, however a card can prove to be immensely beneficial. With no other credit on your report, a card can be used to build a credit history over a period of time. Hence, making a card application and using the card well on receipt can in fact help build your score and improve it subsequently.

Keep in mind that your card comes with a pre-determined limit, and the ideal usage would be to not exceed 30% of the same. A part of responsible credit usage, this behaviour indicates to a lender that you are financially solvent and can service your dues.

In conclusion

Yes, there are several advantages to owning a credit card as listed above, but the proviso is to use it responsibly. Never get in over your head such that you find it difficult or even impossible to pay regularly.

Your credit score being dynamic, every account therein has an impact on it. Ultimately, a credit card alone cannot help build your score and improve it – well-ordered finance is the best way to ensure that.

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