We are opting for credit cards now more than ever. Mint had reported in October that the number of credit cards issuances were set to exceed the 28 million-mark it had clocked in March 2008. This figure may also rise with the government’s recent cashless economy push, which will increase the demand for credit and debit cards. Customers have increased their reliance on credit cards for their debt requirements too, data from the Reserve Bank of India (RBI) shows.
Outstanding loans on credit cards, as of 31 August, was Rs46,300 crore—up 28.7% year-on-year. Experts feel that people today are spending more on their credit cards due to rising online purchases, and attraction of reward points. While banks thrive on such spending by customers, you must ensure timely repayments and thus avoid falling into a debt trap.
Here are some common mistakes that one must avoid while using her credit card.
Banks give you the option of paying the minimum amount due on your credit card bill by the end of the interest-free period. Beyond this, you can carry forward the remaining amount balance to the next month. But you will have to pay a monthly interest on this amount, which on an annual basis, could be as high as 36%. The amount you choose to pay later will attract interest every month till you have completely repaid it.
“Paying the minimum amount due fulfils a borrower’s obligation towards the bank and may not impact the (customer’s) credit score immediately. However, consumers often fall into a debt trap… this eventually leads to the borrower having a large credit outstanding which could increase her debt burden,” said Mohan Jayaraman, managing director, Experian Credit Bureau, India.
Once you have made a big purchase, say, of Rs20,000, on your credit card, banks usually offer you an option to repay this amount through equated monthly instalments (EMIs). The interest rate charged on this amount is lower than the annual interest charged by banks on an outstanding amount in case of revolving credit. While this interest rate varies across banks, it is in the range of 13-18%. You may want to opt for these schemes as they help ease your payments, make sure you don’t make multiple purchases on EMIs. “One may get complacent and keep adding more EMIs, and fall into a debt trap. At the most, one should have two EMIs; not beyond that,” said Rishi Mehra, founder, Deals4Loans.com. If buying something on EMI, also study the charges such as processing fee or interest rate.
Lenders allow you to withdraw cash using your credit card from any of the bank’s ATMs. While this looks like an easy access to cash-based credit, the charges are heavy. The interest rate in this case can be equivalent to the rate charged for revolving credit facility.
“This (cash withdrawal) comes with a higher interest rate with immediate effect, until you have cleared the entire outstanding amount,” said Naveen Kukreja, chief executive officer and co-founder, Paisabazaar.com
While you should pay all your bills on time, it is of utmost importance to pay your credit card bills by the due date. If you fail to do so, the repercussions can be heavy.
“Timely payment of loan EMIs and credit card bills by the due date is important for maintaining a good credit history and a healthy credit score,” said Harshala Chandorkar, chief operating officer, TransUnion Credit Information Bureau (India) Ltd (Cibil).
A credit card offers interest-free credit for a brief period. But indulging in unplanned and reckless spending just because the card offers a credit limit doesn’t work well. “In such cases, an individual does not plan about how she will repay this debt. You need to have surplus funds to make such payments,” said Suresh Sadagopan, founder, Ladder7 Financial Advisories.
What you should do
A credit card is a resourceful option when you are short of funds at a particular time, or even to build a credit score. But financial discipline is important in such cases.