Amid ongoing discussions about credit card usage, some reports indicate that younger generations, particularly Gen Z, are facing increasing financial challenges. Many are still grappling to understand the pros and cons of credit card use and how to manage wisely. Is there a gap that needs to be addressed to bridge the issue of escalating credit card debt and declining credit scores?
CA Shreya Jaiswal, Founder at Fawkes Solutions and Finance Influencer explains, “If you do not have control over your expenses, or you are someone who is a spendthrift, no matter what amount of money you have, then do not use a credit card, it is as simple as that, because irrespective of the benefits of a credit card, your habits will take you down a financial drain.”
Shreya advises the youth and others to treat a credit card like a debit card, emphasizing that spending should be limited to the amount of money available in their bank account.
“This ensures two things, number one, that you’re not spending the funds you do not have, and, number two, you’re still taking the benefits of all the rewards and wave of policies that a credit card offers,” elaborates Jaiswal.
Are banks luring customers?
Exploit the sign-up bonuses that a credit card offers. Whenever you apply for a credit card, banks often entice you with various benefits, such as air miles, free movie tickets, or travel-related perks.
“If you’re planning to take a credit card, you can plan it to take it around a time when you’re planning a trip, because more often than not, all these sign up bonuses go for a waste. People are unable to use it because of the ineffective time of purchase. So you can plan your credit card purchase accordingly,” said Shreya.
Never use credit cards for cash withdrawals, here’s why
She further says, “I think almost all the banks, they charge very heavy fees as well as interest when you withdraw cash from the credit card, and most of the people are not aware of it, so avoid doing that.”
She warns against falling into the trap of paying only the minimum amount due on credit card bills, a common mistake among those new to managing finances. While banks provide the option to pay either the minimum or the total amount due, choosing the minimum often results in accruing interest on the remaining balance.
“And in case you’re using multiple credit cards, always have a tracker app in your phone that helps you track what is the overall spending limit and all those cards. Because what happens is, people using multiple cards, forget that, okay, this is the amount they’ve actually spent which leads to debt accumulation in the first place,” concludes Jaiswal.
CA Akshil Mehta, Assistant Manager, UAE Corporate Tax, also shares his insights saying, “The Foremost thing people should look at while spending through credit cards is their income. One should have strict financial discipline while using a credit card. A person should never exceed the income threshold even though the credit limit is more. This is a trap and people do fall prey to this. Credit cards, to the extent necessary, should be used only for necessities.”
Mehta emphasizes the importance of “smart investing” and notes effective strategies for reducing expenses in the long run.
“I originate from India and India has inculcated the discipline of investment. Every month through SIP/ transfer to fixed deposit or recurring deposit people can plan and achieve their short and long term goals. Every month a minimum of 15% of income should be saved. This will help individuals in the long run as well,” he says.
Akshil also explains the lucrative zone trap, which comes when banks offer flexible payment options to customers allowing them to convert their credit card bill payments into EMIs: “EMIs are generally accompanied with interest which is an added burden in addition to the original bill amount. Such easy EMI payment plans may lure individuals to buy more things on credit which will ultimately lead to debts.”
“But, as we say, a coin has two sides, if used smartly and wisely, one can earn a good amount of cashbacks and enjoy discount vouchers/ other perquisites from credit cards as well,” he notes.
