When the first credit cards were launched decades ago, the purpose was quite different from what many people use credit cards for nowadays. In those days, a credit card was something gentlemen carried with themselves just in case they fell short of cash while dining with friends or family at a restaurant. Gradually all kinds of establishments, including airline companies, began accepting credit cards in lieu of cash.
Today credit cards have become as ubiquitous as cash and debit cards. So is it only because of the convenience of not carrying cash that credit cards are so popular? Or do people use credit cards only to tide over a temporary cash shortage before the next salary? Yes, these two reasons are true, no doubt. But people use credit cards for a number of other purposes as well. Let us look at a few such reasons below :
Credit Score : For any unsecured loan (and also several secured loans), the lending bank necessarily looks at the applicant’s credit repayment history, and uses the CIBIL score to assess this history. But many people do not have a credit history at all if they have never taken a loan earlier. In such scenarios, some people apply for a credit card (on the basis of salary etc.) and then use it a few times every month for the next 4-6 months, taking care to repay the amounts diligently as per due date. This helps them build a credit history and also get a good score, which would help in getting a loan approved.
Travel Bonuses : A frequent traveller would be eligible for a number of reward points, cash backs and travel privileges if he buys the tickets using certain credit cards. This is the reason why people who travel very often usually apply for a co-branded travel card, so that they can tot up tremendous savings though the year, and also avail prestigious benefits of lounge access, priority check in etc.
Reward Points : Travel is just one aspect of credit card usage, but credit card holders use it for many other purposes like booking movie tickets, buying groceries, eating at restaurants etc. Most credit cards provide usage points for every swipe at such establishments. Every rupee spent using a credit card would attract a certain number of points. During special offers, each such rupee spent would attract double or triple the number of points. Once these points get accumulated they can be redeemed for attractive gifts.
Cashbacks : Another way credit card companies reward usage of their cards is by immediately (or at least within the same billing cycle) refunding a small percentage of that spend to the user. The percentage of cash back is usually subject to a cap. For example, a card which announces 5% cashback would credit your credit card account with Rs. 250 (or the monthly cap, whichever is lower) if you spent Rs. 5000 using the card at an establishment designated by the credit card for the cashback.
Temporary Cash Shortage : All the above uses and benefits of credit card are push benefits from the side of the credit company to encourage increased use of the credit card. But a temporary cash shortage (maybe till the next salary) is one of the primary reasons why a person prefers to keep and use a credit card.
Rolling Credit : This is one use of credit cards which only the financially savvy users would be able to do. They take multiple card with evenly spaced out billing dates, and use the repayment dates smartly to ensure no credit card due goes overdue.