The good and bad of credit cards
Credit cards can give you lots of discounts, reward points and relief from of carrying around cash, unless of course, you don’t use them well
Credit cards are such good things; they enable you to buy stuff even when you don’t have money in your pocket at the moment. This is precisely what also makes them a double-edged sword—they encourage debt. Not just any debt, the costliest debt possible with interest amounts ranging between 36 – 40 per cent per annum.
Well, just like everything else, a credit card also has its share of goodness. If used wisely, it will not turn into the debt demon, which people with negligence make it out to be.
The good side
Emergency use. Credit cards were meant to be of help in case of emergencies. They are great, only if you pay your bills on time.
Reward points. All credit card purchases earn you reward points, which can be redeemed after you reach a set limit. The reward point structure differs from company to company.
For example, some cards give you a point for every Rs 100 spent [the amount can vary from card to card]. Obviously, the wise thing to do is to opt for a card that gives you the best reward system.
Cash back. Many credit cards offer cash back when you make purchases above a certain amount at one go. Check if your card offers this feature. If it does, don’t forget to check if the cash is credited back to your account.
Discounts. All credit card companies have tie-ups with certain brands so you get discounts when you buy that brand using your credit card. Keep updated on such brands to avail the discounts.
Interest-free loan. If you pay back the money you spent on your credit card on time, then this becomes the biggest advantage. You are getting an interest-free loan amount from the time you make the purchase to the time you have to pay the bill. Select a card company that can give you the maximum grace period. But always be aware of your billing cycle. This way not only do you not miss out on payment of your card dues but also can take maximum advantage of it.
Credit shield. This is insurance on your card—in case you lose your job due to any reason, the insurance company pays your credit card bills. However, they only cover the minimum payment requirement of the credit card dues.
International travelling. Cards can be handy when making payments on international trips because of the freedom from exchange rate hassles. By swiping a credit card you pay at the official rate, which can be advantageous to you.
Credit history. Credit cards are a very good indicator of your credit history [if you are regular with your payments], which benefits you when applying for loans.
The bad side
All the above points are advantageous only till the time you pay your bills on time without carrying forward your bill amount. And if you do carry it forward, and keep paying the minimum amount due, only the late payment fee will be waived off. You will still have to pay the interest charged, which is 3 – 3.5 per cent per month.
And your debt keeps continuing from cycle to cycle till you pay off the entire amount or at least a large chunk of it. The trouble with people is that they borrow from one credit card to pay off the amount on the other and keep sinking deeper and deeper into debt. Once you slip into the vicious cycle of credit card debts, you are inviting big trouble.
How to get out of card trouble
If you are caught up in sinking sand of credit card debt, here’s a helping hand to get you out.
- List all your credit card dues from the highest interest rate to the lowest one. Once this is done, you need to set yourself a time frame within which you will pay off the loans. Prioritise which loan you would pay off first—the one with highest rate of interest will go first and so on.
- Cutting your expenses. Then, start making a monthly budget wherein you list all your expected expenses and the amount allotted to it—stick to the budget. Also write down the actual expenses incurred besides the expected amount at the end of the month to help you evaluate where you are going overboard. Cut down on unnecessary expenses and use the amount saved to pay off your debt.
- Pay off with savings. If you have decent amount of savings, pay off your credit card outstanding with that money. It makes much more sense to redeem your savings and free yourself of the trap than to pay 40 per cent rate interest per annum on the debt. Even part-repayment is more beneficial than paying the exorbitant interest amount.
- Requesting the bank. In case you cannot pay off the amount with your savings, approach the bank. Request them to give you a time frame wherein the rate of interest is low and you will pay off the entire loan amount. If they feel you are genuinely trying to pay the debt, they will accommodate you. Once you have paid your outstanding balance, stop that card.
- Transfer balance. With increase in competition banks and credit card companies are always looking out for customers to meet their set targets. They are more than willing to transfer the outstanding loan on a particular card to their own card at lowers interest rates. In case the existing card bank or company does not lower the rate of interest you can scout for banks wherein you get low rate of interest than the existing one.
You should then transfer your outstanding balance to that bank or company. Remember that this does not mean you can then take your own time to pay off your debts. There is a minimum balance limit; which means only if your outstanding balance is of a certain minimum amount, can you transfer the debt. This minimum limit varies from bank to bank. Also, the low rate of interest is for a certain period during which if you do not pay the balance, regular rate of interest apply.
- Consolidation of loan. As a last resort, consolidate all your loans by taking a personal loan. Take one personal loan and pay off your credit card loans. This way you just have to pay back just one loan. More so personal loans have interest rates between 15 – 18 per cent per annum and are cheaper than credit card loan. Do your calculations before you decide to take the plunge.
- Debt counselling. Take professional help. There are councils and non-profit organisations that can help you in consolidating your debt and help in paying them off. Do a thorough research before finalising on an organisation. You can even take help of financial advisors.
The safe approach
Once you have settled your existing debts, throw away all your credit cards as the first step towards a debt-free life. Or at least don’t go beyond having two.
Follow these simple steps:
- Prepare a budget.
- Do not use the card for small or unnecessary expenses.
- Pay your bills on time.
- Keep all bills so you can tally them against the credit card statement.
- Keep a reminder or set a direct debit facility wherein the due date of the credit card payment of your bill is settled from your account. Remember to maintain the amount in your account.
- Never borrow cash against your card.
- Search for a card with maximum grace period and maximum benefits.
Sheetal Jhaveri holds MBA[Finance] and CFP degrees and is also certified by AMFI and IRDA. She runs her own financial consultancy in Mumbai and writes on finance for several leading publications. Besides her profession, she loves to travel, read and paint.
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