What comes to mind when you hear the mention of credit cards? Do you instantly foresee possible problems like how the debt might accumulate and overtake your power to pay or how the fees are high? Or do you imagine an excellent financial tool?
Whichever side you lean on, you are not alone. Credit cards are a relatively obscure financial product that is not very well understood - especially in Kenya. Due to the scarcity of reliable information, there is a lot of mystery, fear, and misinformation out there. Many people do not know what to expect.
But it doesn’t have to be so. Credit cards, just like many other financial products, have their pros and cons, and with the right information, they can be a great asset towards your financial freedom.
As such, and contrary to the popular misconception, there are some major advantages to having a credit card. Continue reading to find out some of the very key benefits of having a credit card.
Let’s say you have an urgent need and need funds in the next two hours. What options do you have? Where can you get an instant interest-free loan right at this moment? Maybe a few friends and family? Or a quick advance request from your office? Neither of these two is guaranteed.
A credit card offers you a quick solution in such circumstances. And the cherry on the cake is, at no interest. One of the major benefits given by most credit card issuers is the interest-free period - which ranges between 30 and 60 days.
An interest-free period is defined as the period where no interest is charged on any expenditure. If you settle your bill in full by the due date, your bill will accumulate no interest.
With credit cards, you get rewarded for spending. Sounds too good to be true, right? But it is true.
Depending on your card issuer, there are many rewards you can earn while you spend using your credit card. Credit card issuers offer a responsible credit cardholder many benefits, from flight miles and hotel perks to cash backs, etc.
You might be wondering how this is a benefit because you are still spending money. However, wouldn’t it feel great to get a portion of the money you spend back in the form of a cashback or another type of benefit?
For example, many credit card issuers offer 1% or 2% cashback (which might not feel like much, but it sure adds up over time). Other credit card issuers also offer reward points instead of cashback.
In reality, credit cards typically charge the same or higher interest rates than personal loans. For example, the credit cards available in the market today charge an interest rate of between 0.9% to 3.9% per month. This is the same as the average lending rate of 12.120% pa for personal loans in Kenya by the end of Aug 2021.
However, unlike personal loans that start accumulating interest from day one, credit cards have an interest-free period whereby the loan doesn’t accumulate interest - the period ranges from 30 to 60 days.
For example, imagine two shopkeepers. They both urgently need Ksh 100,000 to restoke because their debtors are yet to pay. Shopkeeper 1 uses his credit card (with an interest-free period of 55 days) and can restoke his shop the same day. Shopkeeper 2 approaches his local bank and applies for a loan, which he luckily receives two days later. But despite the inconvenience, he is still able to stock his shop.
As luck would have it, they both receive money from their debtors and pay back the loans within a month. Which shopkeeper do you think paid less for the same amount of loan?
Obviously, shopkeeper 1. Because he paid the loan within the interest-free period, the loan did not attract any interest. On the other hand, the shopkeeper 2 loan attracted interest from the get-go.
Sometimes you can find yourself in a dire situation, but you do not have enough cash at hand. What do you do? In most cases, you start calling your friends and family for help. But sometimes, the help you need does not come.
But it is different with a credit card. When you have a credit card in good standing, it can come in handy to provide an instant solution to paying off many unexpected expenses. For example, if you are traveling abroad and you miss your connecting flight for some reason, you don't have to worry about whether you have enough cash on hand to rent a hotel room as long as you have your credit card with you.
Here is one of the most unexpected benefits of using a credit card. Credit cards can be a convenient way to budget and control your spending. Most credit cards have a coordinated way of classifying purchases that allows you to get detailed spending reports upon request. Some credit cards even have an alert system that you can set to send you an alert once you have overspent on that particular class of purchases.
In this way, you can keep track of where your money is going cut on any unnecessary expenditures. In addition, you can keep track of your credit balance and tame your spending to avoid bursting the credit balance.
Although credit cards can be a great threat to online fraud, they offer better protection against fraud than other financial tools such as a debit card or cash.
For example, if you were in a foreign location and lost or robbed your cash, the chances of recovering the cash are not very high. On the other hand, if you lose a credit card, you will not be liable for any fraud as long as you report the loss immediately. This is the same case if you notice suspicious transactions on your card (say someone found your card information online and used it to commit fraud).
Even if the thief starts using your card right away, you won’t lose much money since charges to credit cards aren’t withdrawn immediately. If the same happens with a debit card, you will lose money since debit card funds are deducted instantly, any money spent on the card will be gone.
Most credit cards are accepted worldwide. This means that when you are traveling outside the country, your credit card will provide a convenient way to pay for all travels expenses without the need to carry and exchange a large amount.
In addition, it provides the best foreign exchange conversion rates without the need to negotiate or carry around actual cash (however, sometimes there might be a credit card foreign exchange fee charged).
Another no so popular credit card perk is credit card purchase protection. When you purchase something using a credit card, you earn the right to claim with your issuer to receive a replacement, repair, or reimbursement for stolen or damaged goods.
This is an extended warranty in addition to what you already receive from the supplier for big purchases of items like appliances or electronics. Imagine how much you would save if you had to repair your refrigerator one and half years after purchasing it(most supplier warranties are a maximum of 1 year)?
Other credit card benefits include:
So there you have it, credit cards are not only convenient, but they also carry with them a lot of advantages that might be beneficial to your financial future. You can use them to manage your day-to-day spending, use them when you are short on cash and expect money in a no-so-far future, as well as a way to secure your money while traveling.
However, just like many other things in life, they also have their dark side. But by cultivating responsible credit card habits, there is no limit to how useful a credit card can be in your life.