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Ashwin Kumar Palo

Possessing a credit card is a goal many young adults cherish throughout their college years. The first job they get gives them the right to avail credit cards. But since debt is an extremely risky tool that could threaten their financial security in the beginning, a prudent method suggests that they be cautious about using this method until they are capable of handling financial issues. We will nevertheless explain the reasons why one should keep this in mind while using these credit lines. 

It is used in times of emergency, when your savings are less: Young earners at the beginning stages of their career, usually when the pay is low, it could get difficult to build up a good savings or a sufficient reserve fund for any exigency. This is why credit cards can be an effective instrument. On one hand, it gives you the ability to access funds, and on the other, it provides you with the opportunity to use credit between 45 and 90 days during which you arrange for repayment. Therefore, even with fewer savings the credit card will allow you to face many adverse situations that arise in your life.

Credit history that is built for easy access to future credit: Loans have become a major part of financial planning for individuals since many people take secured or unsecured loans at some point in their lives. However, the price that a loan will cost with the interest rate usually depends on how credit-worthy the borrower is. Credit score determines the amount that you are able to access. For instance, your credit score is one of the factors when determining the load upon the EBLR rate when a bank offers an unsecured home loan. Therefore, the better your credit rating is, higher is the rate of interest you will be able to obtain to repay future loans. I have made this error before. I bought a house in Bengaluru two years ago, when my credit score was barely one month old. I had never taken out credit cards, believing it was a waste of financial decision. In the end, it added 0.4 percent the interest rate on my mortgage that added 1000 rupees EMI for the following 25 years. I will have to pay an additional Rs 3 lakh to make up for this error.

A high credit score can give you a greater bargaining power, so you will always be able to get the most competitive prices and products. If you want to get into the future market, a higher credit score can allow you to obtain the most favourable rate for other kinds of credit, such as personal loans as well as home loans. There are a variety of Banks and NBFCs are now offering an interest rate that is lower for those with a high credit score. Additionally, the score that you have is excellent, you can avail an increased selection of deals to choose from. Also, in many instances the process can be simpler, allowing you to save time and money.

Benefits of cashbacks, discounts promotions and offers on purchases: Many of the products have rewards linked to credit card payments that you cannot receive otherwise. Thus, many such cashback offers as well as discounts and other deals are available via credit cards. Amount remains same; however, the payment method is changed. Credit cards give you an increased purchasing power as well as the possibility of earning rewards. Credit card purchases are accompanied by an interest-free time period that could last up to 45 days. This gives you an opportunity to earn high rewards.

Access for many top-of-the-line privileges: Many credit cards come with different privileges including free lounge access to international and domestic airports, complimentary access OTT platforms, 24/7 concierge services as well as the ability to access golf clubs across the globe, and so on. A lot of these privileges are included in your card, and you can choose the one that best suits your needs.

Provides you with the education curve for managing your finances responsibly: Each time you think about spending money, you should consider the advantages and disadvantages of using a credit card and comprehend the benefits that come along. The responsible use of credit is an essential knowledge that will allow you to manage your finances efficiently.

Imparting mindful risk management: The most important thing young adults should be taught is to become aware of the dangers of using credit cards. If you're not sure about handling these five risks effectively, the use of a credit card might not be the best option for you.

Examining any urge to spending too much: With a credit line in your possession, the very first thing you will need to be able to manage is the temptation to overspend. Because credit cards offer an interest-free period which can be extended to more than 45 days, and there is no withdrawal from your bank account in a matter of minutes. There is the tendency to go in the sand and then overspend. This could result in a rise in debts on your credit card, leading to little or no savings or even worse, then being unable to pay it back in full and on time. This is will not just ruin your financial situation but also damage the credit rating.

Just paying the minimum amount is extremely expensive: If you opt for the payment of the minimum dues in every credit card statement, it will cost you an enormous amount. Because of the same reasons mentioned in the previous para, simply paying the minimum balance isn't a good option. Consider that the card pays an annualized interest rate of 36 percent, and a sum of Rs 500. Let's say you've spent Rs10,000 from the account. If you pay just the minimum amount then you would need to wait 17 years to pay off the debt and the interest you pay on your own would be approximately Rs 15,000.

Learn about the cost of procrastination: Credit cards typically are characterized by a high-interest rate for credit that is revolving. Additionally, they are accompanied by higher penalties. There are interest, charges and penalties if the bill is not paid on time. With an interest rate of 2-4 percent per month, that's 24 to 48 percent over the course of a year. If you are able to use your credit too much, it can be a costly proposition for you. 

Credit limit is partially used limitation: While the idea is to improve your credit score using your credit card, the percentage use of your credit limit is a crucial factor. If you can limit your use of credit cards to 30-50%; for example, if your credit limit is Rs 50,000 and you are able to use more than Rs15000-Rs 25,000 every month, this will help you improve your credit scores.

Do you need a credit card when starting the first day at work? Rather than the age or the stage of your career, it's more important to have the knowledge of the risks and benefits of a credit card. There's no best time to avail your first credit card. It is important to understand the fundamentals of how cards function, and accordingly develop financial discipline to be able to utilize those with confidence to avoid financial problems. If you feel confident in your ability to be disciplined with the repayment process and manage borrowing responsibly, credit cards can be an excellent tool to control your finances. Once you know that you shouldn't take more than the amount you are able to afford to repay and stick with paying bills in full every month, well in advance of when due, rest assured you're prepared for the very first credit line.

(DISCLAIMER: The views expressed are the author’s own and have nothing to do with OTV’s charter or views. OTV does not assume any responsibility or liability for the same.)

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