Sreenath* is a compulsive spender, has four credit cards, and uses them all. He struggles to pay his bills occasionally, and draws cash from one card to clear the dues of another. Sometimes he tops up a digital wallet using one credit card and uses that to pay the bill of another one.
He is aware of the charges (about 2.5 percent of the amount withdrawn) when he withdraws cash and is also aware that he will be charged a fee while transferring money to a digital wallet. But often has no option.
That was not a problem Rakesh faced. He wanted to take advantage of the credit period available in every billing cycle, and had linked his bank account to the card to avoid missing payments. He did this as he knew that keeping bills pending leads to hefty charges. On the flipside, in case of any wrong billing by a merchant, the amount would get paid automatically. Rakesh had never faced this though.
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The perils of autopay
But there are instances when an erroneous transaction (like a utility bill) gets paid automatically when the bank account is linked to the card. In such cases, a lot of work effort goes into addressing the issue post facto. While one earns reward points when paying for things through credit cards, in such cases autopay can have a bit of a downside.
People also link cards to various platforms (like OTT / media / podcast subscriptions, etc) to try out the service using the free trial period, but forget to unsubscribe if they do not wish to continue -- and the monthly billing continues automatically. One often realises this after many months during which time much money has flown down the drain.
Likewise, while many people mean to pay their bills by the due date, they tend to forget at times. So, if they have not linked their bank accounts to their credit cards and enabled autopay, they end up paying charges on the outstanding amount. Further, late payment also affects their credit score even though no dues may be pending. Cardholders often realise this when their home / personal loan application gets turned down because of poor credit standing.
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Weigh the rewards vs the risks
Given the above, other methods of managing payments – like debit cards – are worth considering.
With credit cards there is a tendency to overspend as one need not have the money in the bank for what one wants to purchase. As for debit cards, you can only spend if there are adequate funds in the bank, which works as an inherent control mechanism. One can also use other convenient means such as wallets, UPI, etc, which work in a similar fashion.
Reward points, air miles, cash-back on usage, etc, are talked up a lot. Reward points offer low conversion rates into Rupees, which means that the user gets a pretty small 'return,' as little as 0.5-1 percent of the spends.
Where the conversion rates are a bit better, the reward points can be redeemed only on the card provider's in-house platform, limiting its use. Lastly, there is a craze about using the card at airport lounges for free refreshments. But now even some debit cards offer this.
And even if yours does not, one can simply buy the food at the airport. It will be far cheaper than the various costs one may incur with a credit card.
A credit card is a convenience and works well if used correctly. But the benefits it confers is overhyped, so much so that people walk into financial crises because of their cards. It’s time we realised this.
*All names and examples are fictitious, used only for illustration purposes.
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