Personal Finance 💲
You are losing money if you are not using a credit card. Let me explain you through an example.
Say you want to buy a ₹10,000 smartphone. If you are not aware about the concept of credit cards you most probably will use the money sitting in your bank account. There are many drawbacks of that:
You will need to have ₹10,000 in your account:
And if you have that much money in your account you are losing money.😖 Why? Currently, India has an inflation rate of around 6%. This means that ₹10,000 will be worth only ₹9,400 (₹10,000 - 6% of ₹10,000) after one year. Typically banks give around 3% interest on savings account. So if your money is parked in a savings account, your ₹10,000 will be effectively ₹9,700 (₹10,000 - 6% of ₹10,000 + 3% of ₹10,000) after one year.
Now imagine if that money was invested into a mutual fund giving average returns of 10% every year. Your money will be effectively ₹10,400 (₹10,000 - 6% of ₹10,000 + 10% of ₹10,000).
Do you see the opportunity cost?
You are losing ₹700 if you have those ₹10,000 in a bank rather than in a mutual fund. (₹10,400 - ₹9,700)
Taxes on selling assets:
Say all your money is invested in different assets and you want to buy a phone but don’t have a credit card. You then will have to sell one of your assets to purchase that ₹10,000 smartphone. Now you can do that but the profit you earn on selling those assets (say shares in this case) will be subject to taxes. The taxes will be high or low depending on how old is your investment in those shares.
You’re losing free money:🤔
All credit cards reward you for spending money. Typically you can get between 1-3% cashback on all your spends. So, with a 2% cashback you will get ₹200 (2% of ₹10,000) back!
Rewards for paying credit card bill:
When you pay back your credit card bill every month, you get rewards. This can be in the form of air miles that can help you get discounted airplane tickets, or reward points that you can exchange for vouchers, discounted hotel stay etc. Say, when you pay back your bill you get reward points which you exchange for a ₹100 Amazon gift voucher.
Isn’t this free money!? 🤑
So, when you buy that ₹10,000 smartphone without a credit card you lose ₹700 + ₹200 + ₹100 = ₹1,000. You are losing ₹700 (point 1.), ₹200 cashback (point 3.), ₹100 worth of vouchers (point 4.).
Don’t be the one who leaves money on table!
What next?
Up until recently I was a student and hence had no option of applying for a credit card. Therefore I went for Slice card, that I would say is like a credit card for youngsters new to this whole credit concept. Highly recommended!
Listen! ⚠
Credit cards are very interesting thing and can be very beneficial if you use them diligently. Some points to note:
Always spend only that much that you can pay back.
Always pay your credit card bill in full, every month.
If you fail to pay your bill back in a cycle, the banks charge an interest rate of 35-40% per annum on the amount due. This is criminal but it is how these banks earn! Please don’t make the bankers more rich!
Book alert!📗
I’ve been reading Financial Freedom by Frank Sabatier this week. Really enjoying the way he has put together this book which traces his journey — and how you can do the same? — of retiring as a millionaire by the age of 30, starting with just $2.26 in his bank account at 25 years of age. Frank also discusses on how to use credit cards cleverly.
Watch time!
Not into books? No worries! Watch this video by Ankur Warikoo on how to use credit cards intelligently:
Quote of the week
Frank Sabatier, author of Financial Independence on who is an entrepreneur?:
You can be an entrepreneur simply by selling something people will buy. If you make any money outside of your full-time job, even if it’s an extra $10 a week, then you are an entrepreneur.
Until next week, ✌
Jainuine
Hi Tanmay,
I enjoyed reading it, the use of numbers makes it accessible to a larger audience. I was wondering about the fee of just having a credit card. For the slice card, it's free but I think for a lot of the other credit cards they charge some amount to just keep the card. I will look it up.
It's a good start, all the best!
Really loved it, will tell about it to my parents. Will be a lot of help to my father and sister who recently started using it.