Buzz - Using Credit Card for Budgeting.
In the first article under 'Buzz' section of the Minutia newsletter, We are going to discuss how the use of Credit Card for budgeting is gaining momentum in India and how we can make use of the same.
‘Buzz’ section under the Minutia is about discussing the latest the happenings, ideas and news in the finance world in simple terms. ‘Buzz’ will try to let you know how the news is going to affect your personal finance.
In the first article under the ‘Buzz’ section, we are going to discuss the buzz on social media these days - Use of Credit Card for Monthly Budgeting.
Budgeting is a hassle.
And no matter what tool you use, it is a cumbersome activity to track every expense, planning for future financial needs, savings and investments. But the plus of budgeting will outweigh all of these. So people try all sorts of things to reduce the friction of budgeting and to stay consistent with budgeting.
A major part of any household budgeting is tracking expenses, or at least taking care of it without a thought at the back of the head.
To make it easy to keep track of the expenses and keep a check on the expenses, most would separate the expenses and income in two different bank accounts. This will ensure that you stick to the adage - First save and then spend whatever is left.
But not everyone can execute this, the extra steps of maintaining two bank accounts, calculating the expenses ahead and transferring the funds to and fro between the accounts, often deters a lot of people.
For addressing this, some people come up with the plan of using a dedicated credit card for budgeting.
Using credit card for only monthly expenses has its own set of advantages. While, using credit card for budgeting is not a new subject, the western world uses it from a long time. But this idea is gaining momentum in India with the rise of credit cards and lending business. Let’s discuss on how you can use this idea for your advantage.
Before we proceed, know that, this is not a good solution for the most of us and if one is not financially disciplined, then one can easily get into the trap of credit card debt.
Having that cleared, All credit card holders know how credit card works. You are giving a certain amount of loan by the bank under your account, and you are given 45 days time-period to repay the loan amount you used without any interest.
Here, you have the loan amount at your disposal at any given point of time. It is just waiting for you to use it. So why not use it for your monthly spending and pay the credit card bill at the end of the month with your income?
You make all your monthly payments and expenses using the credit card and repay it once you have the bill. When you do this, you are tracking all your expenses of a month in the credit card bill statement.
Credit card statement will tell you where your money is going and what are your major expenses. Instead of you doing the tracking in a spreadsheet, it is the credit card statement doing for you. Thus, you can make easy decisions on where you can cut down your expenses. Another major advantage of this would be that you would be seeing a single figure as payment at the end of the month. You would only be paying the expenses at once.
Banks encourages its customers to use the credit card by providing incentives like reward points, cashback, fuel refilling rewards, online deals, accidental insurances, exclusive lounge access, deals on hotels, travels and a lot more. The more you use the credit card, the more it would create a business for the bank. Why not leverage these incentives by using the credit card and availing the incentives when you can, a win-win situation?
Also, when you make a payment using credit card, you would still have the account savings at your disposal.
Above all, credit usage will improve your credit score. Your credit worthiness will improve and making you eligible for bigger loans in the future, thanks to your solid credit history.
Some take the credit card usage a bit far and invest the money against the credit card limit amount in liquid/overnight mutual funds to earn a minimal interest there too. This is pure leverage, and it is very risky for your financial health, so we are not going into the details of how you can do that.
Conclusion:
Yes! You can use your credit card for expenses only, but it is risky if you are not financially disciplined. The incentives make it more enticing, but the downside is you have to make the full payment of the bill every time but not just the minimum payment. Above all, do not ever use the full limit of the credit card bill. If you can’t, then you must raise eyebrows on your expenses and lifestyle with respect to the income.
If you are not financially disciplined, then do not use credit card!
Until next time.
Peace out!