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Will a credit card complicate your finances?

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Kamla Nair has just started working and is not sure about opting for a credit card. She wants to be disciplined and organised as far as her finances are concerned. She already has a bank account and a debit card. She is also debtfree, except for her education loan, which she hopes to pay off on time. Does she need a credit card?

If Nair’s primary reason for not taking on a credit card is the desire to keep her finances simple, she could make do with just her debit card. However, if she were to take a more holistic view of her personal finances, as someone who will deal with money for a long time to come, she may benefit from having a credit card. A credit card is nothing but an unsecured personal loan from her bank and if used carefully, it can provide many benefits.

First, she would be able to build a credit history, which will show that she is able to service her loans in time. If Nair exercises discipline in using her card, she would be able to repay her dues on time and build her repayment history and credit score. This will come in handy when she needs to take another loan for say a home or a car.

Second, credit cards come with liabilities and insurance for theft and misuse. If her credit card is lost or misused by someone else, she can block the card and seek a waiver of the charges arising from it. Banks usually cover this liability after due process. In the case of a debit card, the loss would hit Nair directly, as the money would be moved out of her bank account, and she would have to make a claim for its reinstatement by the bank, which may be granted after due process.

Third, Nair can earn points through credit card usage, which can then be converted into fuel, air tickets or other white goods, depending on the tie-ups the bank has. Debit cards do not provide such facilities.

A credit card can be misused to run up large dues, which can hurt the holder’s finances. But when used with care and diligence, it can offer benefits apart from the basic facility for cashless transactions at merchant establishments.

(Content is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)
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