Unlock Financial Freedom : The Hidden Cost of Not Using a Credit Card

Many people are surprised to learn that credit cards can be valuable tools in the journey toward financial freedom. If you’re currently a credit card user, that’s great! If not, it’s never too late to start. With only 5.5% (as per Forbes ) of the Indian population holding credit cards, there’s a significant opportunity to tap into this financial resource.

‘Boost Your Credit Score and Secure Lower Loan Interest Rates.’

Case Study: Housing Loan Savings

When applying for a housing loan, financial institutions assess the risk associated with the borrower to determine the interest rate. Data plays a critical role in assessing the risk associated. For instance, by using a credit card, you build a credit history and improve your credit score. This additional data enables banks to better evaluate your risk profile, increasing the likelihood of receiving a more favourable interest rate on your housing loan compared to individuals with less financial history.

On average, a housing loan of ?1 crore in our country carries an interest rate of 10% per annum. To simplify, we'll use this 10% as a standard rate without delving into fixed or floating interest rates. Assuming a maximum tenure of 30 years, we'll consider a 20-year tenure for this example. With this term, the monthly EMI would amount to ?96,502.

With a good credit score due to your credit card usage, let’s assume you receive a 0.5% reduction in the interest rate to 9.5%. Your monthly EMI would then be ?93,213. This results in a difference of ?3,289 compared to the EMI of ?96,502 at the original rate of 10%.

Pro Tip: Housing loans or term loans from Federal Bank offer competitive interest rates. Securing a loan at a lower rate can help reduce your EMI even further. Click here to know more.

Smart Investment of Savings

The ?3,289 you save each month should be wisely invested rather than spent. Consider placing it in a recurring deposit (RD) or mutual funds (MF) according to your risk tolerance.

To illustrate the potential benefits, let’s explore what investing ?3,289 monthly over a 20-year period could yield. Although most banks offer RDs with a maximum tenure of 10 years (varies with ALM pattern), we'll use a 20-year timeframe for this example to highlight the potential growth.

Pro Tip: Check Federal Bank ’s recurring deposit (RD) interest rates for potentially higher returns. Click here for more details.

If you have a higher risk appetite, you might consider investing in mutual funds as well.

For more information on mutual funds and how to invest, Click here. Do not delay, start investing today :).

‘Ever Wondered How Credit Card Companies Actually Pay You Rewards?’

To understand how credit card companies pay rewards, it’s important to first examine their revenue sources, which include:

? 7% from membership fees (Annual Maintenance Charges)

? 24% from interchange fees

? 45% from interest charges

? 17% from other fees, such as processing fees

? 6% from returns on provisioning

When you swipe your card, merchants incur interchange fees that are often passed on to consumers. The fees includes 0.1% processing fee, a 0.25% network fee, and an interchange fee that ranges from 1% to 3.5% (Visa and MasterCard typically charge around 1%, while American Express charges up to 3.5%). By using credit cards, you can earn cashback or rewards on your purchases, effectively getting something back for the costs you help cover.

In essence, whether or not you use a credit card, product pricing often reflects these added costs. Therefore, it makes sense to get something back, which is where cashback or reward points come into play. If you're using UPI, you're indirectly covering the cost of these rewards / cashback for credit card users.

The Impact of Cashback

Imagine earning 2% cashback on your spending. If you reinvest that cashback, it could grow to ?7.5 lakhs over 20 years at a 10% return, or even up to ?38 lakhs with returns between 8% and 15%. This highlights how small rewards can compound into significant financial benefits.

Final Thoughts

Credit cards can be a powerful ally in your financial journey. It can help to build credit score, secure loans at lower rates, and earn rewards—all while enhancing your financial flexibility. Always prioritize responsible spending and aim to pay off your balance in full each month to avoid interest charges.

Whether you’re looking to get your first credit card or optimize your current financial strategy, now is the perfect time to take action. Start using credit cards wisely, invest your savings, and watch your financial future flourish!