Slide to Success: How Smart Credit Card Use Can Boost Your Net Worth

Credit cards In the world of personal finance, credit cards are often associated with a debt trap, and perhaps rightly so. However, like insurance, credit cards are often misunderstood due to the web of terms and conditions that apply to them. So how can you understand the terms and conditions and take advantage of some real, tangible credit card benefits?

First, let’s try to understand why credit cards can trap you in a vicious and costly cycle of debt.

What causes the debt trap?

Before you consider how disciplined credit card use can make you rich, you need to know the underlying cause of the debt trap. Understand it with this example:

Suppose you do ₹1 lakh monthly and have long-term savings goals of ₹30,000. So you have left ₹70,000 to spend, of which ₹50,000 is the usual expense of your household, so you have a surplus of ₹20,000 that you can squander.

You can easily have a credit card with a limit of ₹2 to 4 lakhs with that income. Conservatively assuming that you have a credit card with a limit of ₹2 lakhs, you spend using a credit card. The card allows you to spend more than ₹20,000 in a month. So now you have a credit card usage of ₹30,000.

Table: Spending more than you can afford will land you in trouble with mounting credit card debt.

The credit card offers a maximum free credit period of 50 days. Therefore, you will need to return it. ₹30,000 on your card next month. Assuming you have a similar expense next month and the same surplus of ₹20,000, you can pay off the credit card and still have a surplus of ₹10,000.

However, what happens if you have another spree of splurges? ₹30,000 in the third month? In the fourth month, when it comes time to pay off the credit card debts, you will find yourself ₹10,000 left. Starting from the fifth month, you will start accumulating credit cards. debt and falling into the spiral of the debt trap.

Using credit cards with discipline

What happens if you use the card within the cash limit? That is, you spend only what you have left available.

Table: Spend as much as you can afford and stay out of the debt trap.

You might be thinking, “What’s the benefit of having a credit card if I only spend what I have in my pocket?” That’s a fair question. However, the primary benefit of a credit card isn’t an enhanced spending limit, but rather rewards and discounts on your regular spending.

How to make money with credit cards?

Conscious use of credit cards allows you to earn rewards, take advantage of discounts, and benefit from regular promotional offers. This means that credit cards will help you spend a little less on your regular expenses. However, you should choose a credit card that covers the majority of your regular expenses. Therefore, knowing what you spend your money on is a crucial part of selecting your credit card.

For example, if most of your monthly spending includes groceries, gas, dining out, and movies, you can find credit cards that offer cash back or rewards on these expenses. The rewards ratio can range from 2% to 6% of the total amount spent. So if your monthly spending on all of these items is ₹1 lakh, you can get a cashback ranging from ₹2000 to 6000.

We often ignore the cash back and discounts we receive on our purchases. All the unaccounted savings on money spent disappear from our bottom line. But, if you start accounting for these credit card discounts and cash back, you can start improving your bottom line.

How Much Wealth Can Credit Cards Make You?

First, let’s say you’ve been spending ₹1 lakh every month. Assuming you cannot use a credit card for certain expenses, you can pay ₹80,000 with credit card of the total ₹1 lakh. Even if you get a meager 2% refund, you get back ₹1600 monthly.

Invest this money at 8% per year and in 30 years you will have a corpus of ₹24 lakhs, assuming your expenses do not increase. But if your expenses increase with an inflation rate of 5% per annum, you will accumulate a capital of more than ₹36.7 lakhs.

Without a credit card, you would be paying all the money. ₹If you had $80,000 in cash, you wouldn’t have any extra savings left. However, credit cards reduce total spending with rewards and discounts. The key here is to keep those rewards in mind and not let them disappear with regular spending.

How are credit card rewards counted?

First, you need to understand what proceedings They are rewarded and what transactions add to the spending, i.e. they have profit margins. You can have credit cards that offer cash back or rewards on spending like groceries, gas, electronics, clothing, movie tickets, flights, hotel reservations, etc.

You should also understand the difference between rewards and cashback. Rewards are points that will be added to your card based on usage. For example, a card may add 2 points for every ₹100 spent. The refund directly reduces the total amount to be paid to the credit card, making it easier to track the refund.

Credit card rewards have a conversion rate to convert them into cash benefits. The conversion rate for reward points can vary between ₹Between 0.40 and 1 Re per point. Cards with high conversion rates are better, but that’s not the only use of reward points. You can also get discount coupons and buy products from the rewards catalog.

Avoid costly transactions

Be careful with international transactions, however, as most foreign currency conversions incur an additional fee ranging from 1% to 3.5%. Also, avoid using cash on credit cards or at least read the terms of use. Most credit cards charge a high interest rate for cash withdrawals.

Discipline is the key

Our parents have tried to instill a certain level of financial discipline in us since childhood, but in the dazzling world of consumerism, discounts and innovative products, many of us have lost our way and overspent. And credit cards have been that friend that let us get derailed in a supermarket.

It is these moments of unplanned spending that ultimately lead to the debt trap. And yet, it is also true that you can also profit from credit cards with a little discipline.

In conclusion, this is what we think you should take away from this article:

• Understand your expenses before using a credit card
• Use accelerated reward points on certain expenses
• Get a credit card that covers most of your expenses
• Use a credit card only up to the limit you can pay by the next due date
• Be aware of the rewards and discounts offered by credit cards
• Avoid transactions with high overcharge fees on credit cards
• Always pay credit card bills on time

Remember that a credit card is just a tool. If you use it the right way, it can make you rich. If you use it the wrong way, it will quickly turn into a pit of costly and growing debt.

Narayn Verma, CEO and Founder of Standard Money