No-cost EMIs and BNPL schemes are attracting younger consumers who desire flexibility, ease, and control over their payments: Raj Khosla

As we approach the festive season, it is a good time to create a budget for shopping and stick to it, says Raj Khosla, Managing Director, MyMoneyMantra. Track expenses regularly if you are using credit options to get cashback offers and discounts, he says, adding that new credit card users should use it responsibly to build a good credit score and avoid debt traps.

In a conversation with Moneycontrol, Khosla shared his views on using credit cards effectively during the festive season, and compared credit cards, no-cost EMIs, and Buy Now, Pay Later (BNPL) schemes. He discussed the future of credit card rewards programs, which saw a reduction in benefits by several banks in the last one year. He also shared insights on investment strategy to achieve financial freedom. MyMoneyMantra is a financial services marketplace facilitating real-time application of personal loans, home loans, loans against properties, credit cards and MSME loans. It offers personalised solutions across various domains, including loans, credit cards, insurance and investment products.

With the festive season around, what tips can you give to manage credit cards effectively?

Effective credit card management starts with creating a budget and sticking to it, a challenging but crucial step. Prioritise your spending. Maximise savings by taking advantage of available offers and discounts. Utilise credit cards that offer benefits like no-cost EMIs, zero processing fees, instant discounts, and cashback rewards.

There are mobile apps that track your spending in real time, helping you avoid impulsive decisions and stay financially disciplined.

Between cards, no-cost EMIs, and BNPL, where are people spending more? What has been the preferred choice?

The appeal of credit options varies by consumer segment, with no-cost EMIs and BNPL attracting younger consumers who desire flexibility, ease, and control over their payments, with smaller transactions and repayment sizes.

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In contrast, credit cards remain the go-to choice for individuals who value earning reward points, enjoying travel perks, and spreading larger expenses over time, providing a distinct set of advantages and financial flexibility.

Ultimately, the decision between credit options is influenced by individual financial habits, needs, and the distinct benefits offered by each, underscoring the need for a thoughtful and informed approach to credit selection.

The regulator has astutely recognised the lenient credit terms offered by fintech lending platforms and has promptly tightened the regulatory framework, striking a timely balance between innovation and risk management in the rapidly evolving fintech landscape.

What factors can lead to an increase in a credit card interest rate? What should we do if the annual percentage rate (APR) keeps going up?

Be aware that mismanaging your credit card repayment cycle, missing EMIs, and accumulating excessive unsecured debt can lead to increased credit card APR. Banks may perceive you as a high-risk customer, resulting in higher interest rates and stricter lending terms.

Therefore, it's essential to proactively ask your bank if they periodically review and revise APRs, ensuring you're aware of any changes that may impact your credit card terms and interest rates.

If a medical emergency leads to a shortfall in repaying credit card debt, prioritise paying it off as soon as possible and establish a disciplined approach to managing your finances. Collaborate with your bankers to understand your options and work towards minimising APRs, ensuring you regain control over your financial situation.

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An interest rate exceeding 3 percent per month can have a profoundly damaging impact on your finances if you carry the debt for an extended period. Such a high interest rate can lead to a debt spiral, making it challenging to recover and causing long-term financial strain.

If your APR continues to rise, consider taking proactive steps to mitigate the impact: transfer your balance to a lower-interest credit card, negotiate a better rate with your current issuer, or focus on paying off the balance as quickly as possible to minimise interest payments. Failure to act may lead to a deeper financial hole, making it more challenging to recover.

For the new credit card holders, share some insights on using credit cards responsibly to build credit score and tips to avoid debt traps.

To maintain good credit health, ensure you pay your credit card bills and EMIs in full and on time, without any defaults. Additionally, keep your credit utilisation ratio below 30 percent to demonstrate responsible credit behaviour and avoid negatively impacting your credit score.

After six months of responsible credit card usage, consider requesting a credit limit increase to further demonstrate your financial discipline and creditworthiness. This can help you build a stronger credit history, but be sure to maintain your responsible spending habits and avoid overspending.

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Use your credit card regularly to maintain an active account, avoiding periods of inactivity followed by sudden high usage. Consistent usage helps establish a positive credit history and demonstrates responsible credit behaviour.

Avoid falling into debt traps by being mindful of your spending habits during festive sales. Refrain from making impulse purchases on discounted items that you don't truly need and prioritise sticking to your budget to maintain financial stability.

In the last one year, several banks reduced the benefits/rewards on their credit cards. How do you see the future of credit card rewards programs?

A reduction in credit card rewards is often a result of economic conditions and cost management strategies implemented by the bank to maintain profitability and stability in a changing financial landscape.

Additionally, reductions in credit card rewards are also implemented proactively to prevent abuse of the reward program, ensuring fairness and sustainability for all users.

In the future, we can anticipate more personalised and targeted reward programs with an emphasis on delivering experiences, cashback incentives, and strategic partnerships with lifestyle brands.

Furthermore, fintech innovations are poised to play a significant role in shaping the future of reward programs, potentially leading to more dynamic, flexible, and responsive reward structures that better adapt to individual needs and preferences.

How much money is enough to become financially independent? And investment strategy to achieve financial freedom?

A general rule of thumb for retirement savings is to aim for 25 to 30 times your current annual expenses. Based on this, if your annual expenses are currently Rs 10 lakh, you would need to save around Rs 2.5 to 3 crore to retire comfortably, assuming expenses remain at current levels.

However, by the time you reach retirement age, your nest egg could grow to multiples of this amount, depending on your current age and the impact of inflation on your savings over time.

Achieving financial independence requires discipline in managing earnings, spending, savings, and investments. A well-rounded investment strategy should diversify across various asset classes to ensure a comprehensive approach.

For long-term wealth creation, consider a balanced allocation across three key asset classes: equity, real estate, and gold. This diversified approach can help you achieve stable and sustainable growth.

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