AGGRESSIVE private sector banks have cashed in on the booming economy that affords us better income. A younger demographic with clear lifestyle aspirations, a plethora of consumer products (with malls and superstores to buy them) and a 'live for now' attitude have been effectively tapped to promote the use of credit cards extensively.
Now using cards have many undeniable advantages, but they do have their downside too. Let us study both.
Advantages
No need to carry cash
Carrying large amounts of cash is inconvenient. Besides if you are robbed, your money is gone, which is not necessarily the case with cards. Further, there are situations (some airlines, online purchases/ trading etc.) where cash is not acceptable. Here, credit cards offer a safe and convenient option.
Purchasing Power
You can buy stuff with money you don't have. No need to wait and accumulate money for an expensive purchase - just use our card, and pay in convenient installments. This is purchasing power and convenience.
Free credit
Most cards offer an interest-free credit period. Depending on the date of purchase this can vary between 20-50 days. Say your bill dated Oct 12-Nov 11, is payable on Nov 30. Now if you bought something on Nov 11 you get 20 days free credit, and if your purchase was on Oct 12, you get to enjoy about 50 days. Thus, if planned properly, you can enjoy maximum credit every month.
Quick help in emergencies
Credit cards are extremely handy in emergencies. It could be a medical emergency, a car breakdown, an outstation trip on a short notice etc. No need to run around trying to borrow money from your friends/relatives.
Free Offers
Credit cards offer many discounts, promotional offers, reward points etc. The idea here is to maximise your spending. But if you plan your purchases and dues on time, you can get full advantage of these offers, and still not fall into the debt trap.
A parallel record
Credit card bills become a consolidated statement of your purchases. These bills can help you with your budgeting by giving you insights into your spending patterns. Also, if you purchase a product that turns out to be defective, you can ask for replacement/ compensation even if you misplace the original receipt.
Disadvantages
Exorbitant interest
If you do not clear dues by the time your 'credit free period' is over, the interest clause kicks in. Banks typically advertise interest rates of around 1.99% or 2.95%, which appears to be low. Also, in absolute terms, the monthly interest may be just a few hundred or thousand rupees. These create a perception of cheap finance.
This, however, is not true.
The 1.99% or 2.95% pm interest rate works out to an astronomical 24% or 35% on an annualised basis. Also, interest starts from the date of purchase and not the month-end due date i.e. you do not get any interest-free credit period. Three, all future purchases also start attracting the interest charges from the date of purchase. Four, you also have to pay interest on interest. All this adds up to quite a hefty amount.
So pay off any credit card debt, even if it means breaking your fixed deposits or borrowing against investments.
Impulsive buying - shattered budgets
Easy availability can lead to unplanned and impulsive buying. If you don't have enough money to pay up, be prepared for the additional interest burden. This will further increase the purchase price of the product you bought.
Avoid impulse buying, even if you feel you can pay on time. Ignore the high spend limits, make your own. Typically, allow yourself to spend a maximum of 30% of what the bank will let you, and if you reach 45-50%, stop using the card for some time.
Due date for payment
The last day of the month is usually the due date for payment. This is approximately the salary day. But, a mismatch could happen, and you could end up paying unnecessary interest cost. So do try and get in you payment when you get the bill, which is usually 15-20 days before the due date.
Stolen card/ Fraud
Credit cards may be safer than cash, but they can still be stolen and misused. Also, cards are susceptible to a whole different realm of misuse, which cash is not. Therefore, if you loose your card, do inform your bank immediately.
Other precautions:
While transacting online, use only known, trusted and secure sites. Store your card where you can easily notice it's absence Do not give out personal details on phone Keep your card and customer care number handy
The author Sanjay Matai is the Executive Director, Infra Solutions (India) Pvt. Ltd.
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