A reader asks, “Sir, I have just turned 25 and started working since November 2021. I see many of my peers using credit cards. Somehow I am not comfortable with them. Do they really have a use? Can you please an article about this?”
A credit card is one of those things that is neither unnecessary nor necessary. A discussion on this topic in a forum like the Facebook group Asan Ideas for Wealth would polarise opinions. The older folk would say a credit card is not needed, and the younger folk would talk about how much they “saved” from reward points.
The reality is somewhere in between. There are three situations in which a credit card is “useful” or even “essential”
1. Making international purchases: There are some services for which a debit card or net banking will not work. A credit card gets the job done in such situations. Sadly, thanks to RBI regulations recurring international purchases are a problem. Establishments like Amazon AWS or Cloudflare have found a workaround to this problem by raising invoices because they get significant business from India. Others will have to convince, and only a few accept. Nonetheless, there are purchases for which a credit card is necessary. If such purchases are irrelevant to you, you don’t need one.
2. Building a credit score: If you want a home loan or even a car loan, lenders may consider your credit score or debt repayment ability before processing the loan. Those with a permanent government, PSU/PSE, or job may be exempt. For all others, a credit score may help. A credit card with timely payments in full (an obvious given in 2022!) can help.
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3 For emergencies: There are situations in life where you immediately need a big chunk of money, and there is no time to access your usual emergency fund. A credit card can help in such situations, but it only offers you about three weeks (or less) to repay the amount in full. If you pull this off, then there is no harm in using a credit card for emergencies.
However, this is not possible unless you sparingly use a credit card or have a charge card (with no pre-set spending limit) like from AMEX (which unfortunately is not welcome in many places!).
Some people have the habit of paying for everything via credit card. Then that card will not help during emergencies as it may not have enough spending limit. Some would argue for having two or more cards. But that is more clutter than convenience.
Other than these three situations, a credit card is not necessary. Even the 3rd use case (emergencies) is only relevant if one has a credit card to build a credit score or make international purchases. If you don’t need to build a credit score or if you have no international purchases to make, then you don’t need a credit card.
What about reward points and the enormous “savings” one can get from them? They are merely an incentive to keep spending. The benefits are rarely psychological. There is nothing wrong with chasing after reward points, but over the long run, it is an unproductive and often harmful action.
“Enjoying” the benefit of reward points from normal purchases is one thing; spending to get rewarding points is quite another. Either way, the benefits are minimal. Young earners are better off focusing their boundless energy on upskilling, increasing income and building wealth.