A little caution while using plastic money may ensure that you don’t repent at leisure.
New Delhi, Feb 01: Supriya Salunkhe, 24 years old and working for a publication house decided to go on a shopping binge, using her HSBC credit card in October 2000. Within a span of two months, Ms Salunkhe had ran up a credit card bill of around Rs 22,000. Since, she could not afford to repay the entire outstanding amount, Ms Salunkhe got into the habit of making minimum monthly payments. However, her outstanding debt kept ballooning and by March 2003, Ms Salunkhe got a monthly credit card statement showing her total outstanding amount at Rs 32,000. Says Ms Salunkhe: “I immediately called up the card company asking for a settlement and a request to cancel my card.” Selling off her gold jewellery, Ms Salunkhe finally paid the bank an amount of Rs 22,000 as settlement towards her credit card.

Rishi Gupta, a 27 year old businessman has a similar tale to offer. When his mother (who did not have a Mediclaim policy) fell ill, Mr Gupta withdrew money using his Standard Chartered Gold credit card to pay off his mother’s hospital bills. The result, Mr Gupta had an outstanding of around Rs 68,000 to pay up. He eventually had to cough up Rs 53,000 and had to go in for a settlement. Interestingly, he borrowed this money from a moneylender at an exorbitant interest rate.
Clearly these people never anticipated these after-effects while using their credit cards. Moreover they landed themselves into yet another debt-trap while trying to repay their credit card debt. Infact, availing a personal loan to pay off the debt would have been a better move than selling off jewellery or borrowing from a moneylender. Additionally, this option would have enabled them to continue using their credit cards.
Personal loans can be availed at interest rates of around 12-16 per cent per annum, depending on a person’s credit history and his relationship with the bank. Compare this with the interest charged by credit card companies which is around 35.4 per cent annually (2.95 per cent per month). Further, any person availing a personal loan can pay off by way of equated monthly installments (EMIs) and can therefore budget his expenses well.
For instance, if a person takes a personal loan of Rs 1 lakh from ICICI Bank at 16 per cent (depending on various parameters) per annum, then his EMI would be Rs 3,516 for 36 months. If the tenure period is cut short, then, the EMI would be Rs 4,897 for 24 months.
Most of the leading public as well as private sector banks offer personal loans for meeting personal expenditure such as marriage, family functions, medical, educational and travel expenses. Usually, there are no questions asked on how a borrower will utilise the funds availed through a personal loan. The limit of the personal loan would be determined by the borrower’s income and his repayment capacity. Most banks disburse personal loans at a maximum of 12 times the net monthly income for salaried individuals and pensioners and 1 year’s net annual income in the case of self employed professionals. Further, a spouse’s income can also be considered in calculating the loan amount, provided the spouse guarantees the loan or the loan is taken jointly.
The documentation required to avail a personal loan is also quite simple. Salaried individuals will have to submit a copy of the latest salary slip and Form 16 and for self-employed individuals and professionals, income-tax returns for the last two financial years and proof of professional qualification is a must. The tenure of the loan fluctuates between 12 to 48 months. Usually, a borrower is allowed to pay more than the pre-decided equated monthly installments (EMI), without attracting any prepayment penalty while loan processing charges fluctuate between 1-2 per cent.
Owing to the cutthroat competition among banks to expand their credit card customer base, many freebies and rewards are offered with the cards to lure customers. Taken in by this, most people sign up for credit cards without reading the fine print and then repent at leisure. Most credit card customers are not even aware of the various features of a card.
For instance, when a customer inquires about the interest rate applicable on the credit card, the answer is usually 2.95 per cent (varies according to the card company). However, what is not spelt out is that the interest rate of 2.95 per cent is for a month and the same works out to a whopping 35.4 per cent annually. Whenever a card-holder uses his credit card to pay or buy something, he gets an interest-free period of around 45 days, after which interest is applicable.
Then there is the annual fee which is payable at the start of each year. The start of the year, is not the calendar year but the card-holder’s membership year. This means, that if a person has got himself a credit card in August 2003, then he will be billed the annual fee every August, until he chooses to cancel the card.
But the most attractive feature of a credit card is the facility of forwarding the dues. A credit card-holder need not pay off his dues wholly, but can opt to pay 5 per cent of the total amount on or before the due date, every month. The rest is carried forward as extended credit, obviously at a very high price which is around 2.5 - 3 per cent per month.
In addition, there is the very important feature called cash advance, which lets a user withdraw cash from designated ATMs using the credit card. However, it is better to use this facility only in case of emergencies as the interest rate charged on this is also around 2.5 - 3 per cent per transaction.
Credit cards are a blessing to people who know how to use them prudently. Card users do not need to carry huge amounts of cash in their wallets and in case of emergencies can actually withdraw cash in a jiffy. However, alongwith the convenience, customers have to bear in mind that a little caution has to be exercised while using a credit card. Then, a credit card will cease to be just plastic money and more debts.
How To Avoid Credit Card Debt
Work out whether you really need a credit card. If your answer is no, don’t go anywhere near a credit card. Instead, take a debit card which draws straight from your bank account. This way, you will spend within your limits and avoid the debt trap.
Give utmost importance to the choice of the credit card. Look around, make inquiries and then zero in on a card that best meets your requirements. There is a difference between the interest rates charged between card companies, therefore settle for one which charges the lowest.
Before signing on the dotted line read the fine print, interest rate is an important aspect to consider, but there are other additional fees as well.
Be happy with the credit limit given to you and don’t be tempted to increase it. A higher credit limit will mean more spending.
It’s best to set your own credit limit for yourself, meaning set your own spending limits on the card. And do not break this limit, be it Diwali, Christmas or any other important function.
Avoid multiple cards and stick to only one credit card. Sticking to a single card makes budgeting easier. In case you have more than one card, then refrain from using a second card to pay off debts on the first card.
It is best to pay your credit card bill the moment it lands in your hand. Avoid carrying any debt from one billing period to another as the interest component gets added to the principal amount and thats how debt starts to build up. Try to pay off as much as you can manage and more than the minimum requirement.
Some people use their credit cards to get customer loyalty points. Keep away from such “free rewards”, as free can prove to be very expensive in the long run.
Never, never treat the credit card as easy cash. Cash advances on the credit card are very expensive as interest is charged on it from day one.