Despite having several advantages, majority of credit cardholders avoid using credit cards for making big-ticket purchases for the fear of stepping into debt-traps. However, if used with care, caution and little bit of awareness, using credit cards for making large-sized transactions can be a good strategy.
Here’s why you should consider using credit cards for large ticket transactions:
More reward points: Credit card issuers provide attractive reward points that can be redeemed for cash or pre-specified items, and this indirectly helps in reducing your transaction cost. Making big ticket transactions through credit cards would ultimately translate into more reward points and cost reduction. In fact, many card issuers extend cash back offers and discounts on large transactions such as buying air tickets or funding holiday.
It is good practice to enquire with stores or credit card issuer about any ongoing offer on your card before making big-ticket purchase. After all, it is better to make credit card purchase vis-à-vis debit card or cash if it comes with better rewards/ points.
Hassle free conversion of big purchase/s into EMI: If you make large transaction through your credit card, the merchant may give you an option to convert your transaction into EMI (depending on their capability and tie-up with bank i.e.). This allows you to make bigger purchases even if you do not have ready cash for it.
If you opt for this option, you will have to pay more in the form of interest on outstanding balance. This can range anywhere between 12%-20%. However, certain credit cards charge 0% interest on specific offers or extend equivalent cash back. Moreover, conversion of your dues into EMIs will also reduce your credit limit by that amount.
Strengthening credit history: Credit card transactions get recorded in your credit report and hence, making timely payment can increase and improve your credit score. Using your credit card to fund big-ticket transaction and paying it off within the due date will demonstrate that you are a disciplined borrower who can handle large debts well. However, while making big-transaction, make sure that your total dues for that cycle do not exceed 30–40% of your credit limit as this may bring down your credit score. If your intended large transaction does so, request your credit card issuer to increase your credit card limit.
Notional income from interest-free period: ‘Interest-free period’ of a particular transaction is the period between the date of transaction and the due date of payment for that billing cycle. During this period, you are not charged any interest on your transaction, provided you pay off your entire credit card dues by the bill due date. This period can go up to 50days depending on when you made that transaction. For example, if you spend Rs 60,000 through a credit card and avail an interest-free period of 40 days, you are not only financed by your card issuer for those 40 days, you can also earn some interest (however, negligible that might be) on that Rs 60,000 by depositing it in a savings bank account or a debt fund for those 40 days.
Convenience: Credit cards save you from the hassle of carrying cash or cheque book while making a big-ticket transaction. Not many merchants allow you to make purchases through cheque payment as this involves risks associated with cheque bouncing or waiting for a while for cheque to be cleared. Also, carrying fat wallet or pouch full of cash can be risky. In comparison, it is rather convenient to carry credit card along with you as these are usually password protected and also, if you were to lose your card, it can be blocked with just a phone call.
To sum it up, the benefits of using a credit card depends on the skills, knowledge and financial discipline of its user. Shift as many of your purchases, both small and large, to your credit card but make sure to pay them by the due date and stay within the 30-40% of your credit limit. If you do so, the combination of rewards points, the value of cash-in-hand and the improvement in your credit score will be definitely higher than paying in cash or through debit cards.
-by Naveen Kukreja – CEO& Co-founder, Paisabazaar.com
