Guide to Credit Cards and Loyalty in India.

Over the past few months, I've been seeing a lot of very well reputed financial advisors bad-mouthing credit cards, calling it an instrument of wealth destruction. I agree if one is not disciplined with them, you can end up in a big mess. It's our lack of financial literacy that is to blame for this.

I got my first card at 18 and have been using them since then. I put all my spend on credit cards. Over the years, I have had zero late payments, excellent credit utilization, and earned lakhs worth of reward points.

In this post, I'll document some of the best practices one should follow to get the most out of your credit cards. Along the way, this will also help you develop the discipline to avoid the debt trap.

Your First Card

Getting the first credit card can be difficult. I applied for my first card when I got into college. This is very unusual in India. However, most people do it in the west to build a good credit history by the time you enter the job market.

If you are somebody like me who is planning to get one during your college time, you have limited options. Most banks require you to have a source of income (salary slips or ITR) to get one. However, some banks will issue a card against a fixed deposit.

For eg. You can get an ICICI Bank Coral card against an FD of 30,000 with the bank. This doesn't give you any big rewards, but it's a good starting point to build a credit history. Here are some of the features it offers:

  • 25% discount on movie tickets at BookMyShow and INOX.
  • One domestic lounge visit on spending ₹5000 in a quarter.
  • 2 Payback points per ₹100 spent and double the rewards on dining, groceries and at supermarkets.
  • Attractive dining offers.
  • Special offers by VISA.

It's always a good idea to have a max spending limit set on the card. This helps you keep track of your spends, and also limits the risk of fraudulent transactions.

Read may read more about credit card security in the link below:

Growing Credit Card Fraud and How to Prevent it.
Credit cards are usually considered a safer mode of payment as compared to something like a Debit Card because it provides the customer with a grace period where you can file a dispute against charges made on the card. This avoids a situation where your money is stuck with the merchant till the time…

Payments and EMIs

This is an essential aspect when it comes to good credit habits. I can not stress enough how important is it to pay your bills on time. By that, I mean paying the full bill amount and not just the minimum due.

Credit cards are a form of unsecured credit, which is a little riskier than secured credit Eg. a home loan. This means the banks charge a significantly higher interest rate on credit cards as compared to other secured credit forms.

The bank will charge interest even if you pay the minimum due, and this will grow over time if you fail to make the full payment. The only way to avoid it is to never spend more than what you have and always make the full payment.

The next part of this is the EMI purchases. Now some of you might feel tempted to make a big purchase and split the payments over a duration by paying the monthly interest. This is again something one should avoid in the early period. Over time you may end up accumulating all these monthly payments, which may turn out to be financial stress in times when your source of income is disrupted.

One can never be sure of tomorrow, which means you can never say with guarantee that you'll be earning the same amount or anything at all in the coming months. One thing COVID has taught us is how important it is to have an emergency fund in place. You obviously wouldn't want to spend that on the EMIs you have accumulated over time.

Here are a few things to keep in mind:

  • Never spend more than what you have. By that, I mean the full purchase amount, not the monthly installment. If you don't have a spare one lakh in your account, avoid buying an iPhone.
  • Always opt for a no-cost EMI if you need one. If it's not available, you're better off making the full payment.
  • Keep track of your active EMIs and avoid having more than one active EMI on your credit card.
  • Never convert a transaction that is charged in full to an EMI later. You'll pay a significantly higher interest rate as compared to the merchant initiated EMIs.
  • Make sure your card provider offers reward points on EMI transactions.

Selecting the Right Card

Once you have built good credit history and have a good selection of cards to choose from, you can start working on optimizing your reward earnings. Now, there are a few ways to do it. The idea is to earn maximum rewards on your existing spending. Not spending more to earn more rewards. (a lot more people end up doing the latter)

You start by analyzing your past 3 months' statements. In general, the past 3 months are enough to access your spending pattern. I'd recommend using CRED to do it because it makes it really simple to do.

  • Find the top three or four categories where you spend the most. These would be your regular spendings like groceries, fuel, or rent payment.
  • Now check the mode of payment you use for those categories, Eg. Wallet, online spend, POS swipe, etc.
  • The next part requires a little research. Try to find different modes of payments for those categories Eg. you can buy groceries or pay your utility bills using Amazon Pay.
  • Now look for cards that offer maximum rewards in one of those payment modes. You can get 10X reward points for an Amazon voucher using HDFC Diners Black or Infinia. Which can then be used for making insurance payments, utility bills, or buying groceries.
  • You can revisit every 3-4 months and redo it. Each time it'll be less time consuming than before as you get better with it.

Quick Tip: Use a separate email address for all your credit card offers. That way, you won't miss out on offers just because the inbox is too crowded.

This will help you earn a consistent amount of reward points which you can accumulate over a period of time.

On top of this, always aim for a minimum of 2x rewards for each spend on your credit card. Just following these simple tips can help you save roughly 20-30% on all your spending.

Using Rewards

Once you have accumulated rewards, it's another challenge to use them right. I've met people who wasted a big chunk of their miles just because they picked the wrong airline when redeeming them.

In most cases, you're going to get maximum value for travel redemptions. I'm strictly against using rewards for statement credit unless it's absolutely necessary because you'll almost always get the worst rupee to point value when redeeming them for cash.

I'll keep the focus on travel redemptions because who doesn't like traveling? Here's is what you should do in order to maximise the value of your reward points.

  • Have a rough travel plan in mind, Eg. you want to travel to Europe with your family by the end of the year.
  • Now you'd want to list down all the cards that have partner airlines and Hotels where you can redeem your points for maximum value.
  • Pick the airline that has low taxes when redeeming the miles Eg. booking British Airways business using miles will cost you close to ₹50k in taxes. However, on Singapore Airlines or ANA, it can be as low as ₹3k.
  • Sometimes it's better to use miles for Upgrades than for award tickets. You can experience something which otherwise you wouldn't be able to afford Eg. business or first-class upgrades.
  • Redeeming on hotels can be challenging. Sometimes it's better to go for something like an Airbnb if you're traveling with your family.
  • If you have decided to go for hotels, try to find chains that offer free award nights when you redeem your points, Eg. Marriott.
  • Always check hotels cost before you redeem your points for the stay and compare the rupee-to-point value. Places like the Maldives will give you a much higher rupee-to-point value as compared to India.
  • Go for a chain where you have elite status. You will get a better value given possible room upgrades and additional amenities.

Final Words

Overtime you should try to build a discipline. With increasing credit limit one can easily get carried away and end up spending way more than what they can afford. Aim to maximise rewards from your existing spends, rather than spending on unnecessary stuff only because there's a discount going on.

Some may say that's too much effort to earn a few reward points. However, there's nothing wrong with being smart about your spending. I'd any-day take that one free first-class upgrade at the end of the year just by using the right card.

Never think of credit cards as spare cash that you can use and pay later. The ones who actually make use of the perks are the ones who never get them for the credit line in the first place.

With great credit line comes great responsibility.

Share some of your tips and tricks on building good credit habits in the comments below. :)

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