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“Life just seems to be getting simpler by the day,” remarked 22 year Swati, a software developer with a leading MNC. She was referring to the convenience provided by modern-day living aids like plastic money, online shopping, e-payments, deferred payments and the like. “Really?” quipped her grand mom. “We never had any of those in our days, but we did manage to save some money out of whatever little your grandpa brought home.” After discussing the pros and cons of credit cards, Swati realized the trap she was getting into. Typically, credit cards would temporarily boost her purchasing power, allowing her to give into temptations and spend the money that she did not as yet have in her account!! God Forbid, if she wasn’t able to pay in time, there would be the Damocles sword of accumulated charges and higher bills for delayed payments hanging over her head! Together Granny and Swati laid down the rules for minimizing the use of credit cards. 1) Keep some cash in hand or pay 38% rate of interest! It is better to have some cash in hand as withdrawals through credit card from an ATM are subject to interest at around 2.85% compound interest per month. The clock starts ticking from the day of withdrawal and effective annual rate of interest would amount to almost 38%.Besides, a transaction fee of 2.5 to 3% is levied on the amount withdrawn. 2. Swipe only when you are sure Banks generally offer an interest-free period of 20-50 days to credit card holders. Try not to use your card, if you are not sure of repaying the amount within this period. Credit card defaults are not only charged a late payment fee but also attract an interest of up to 3% on the outstanding amount from the date of transaction. The whole point of credit cards, the way they are rendered most profitable, is that we dig ourselves into debt and stay trapped there forever. 3. Avoid jumping your credit limit: Avoid using your credit card if your expenditure is already close to your credit limit set by your bank. Some banks permit overshooting the original credit limit, at an additional charge on the overdrawn amount. 4. Discounts and Sales: Look the Other way A batch of credit cards fattens a wallet before it thins the wallet. If you are a compulsive shopaholic, try to leave your credit cards at home when you go for a first round of window shopping. Come back and thoroughly ransack your wardrobes and shoes to figure out what you really need to buy. Next time take your cards along and try to avoid the temptation to overspend. 5. Reward Points Might not really be rewarding Spend only when you really need something, not for accumulating 1000 reward points on the first swipe of your credit card! 6. Use Money cards or Travelers Cheques while travelling abroad It is always safer and wiser to carry TCs or Money cards for which you have paid in the local currency. Transactions through international credit card are billed at the rate of exchange prevailing on the date of purchase and additionally attract a charge of 3% on the amount. ATM withdrawals through international credit cards are levied with huge transaction fees and service charges. As a thumb rule, try to restrict your spends through credit card to 40% of the credit limit. 7. Is your online transaction secure? Cross check the genuineness and safety of the website when using your credit card for online transactions. Sites with “VeriSign” and the web address https are secure as compared to the web address of http. It is easy for hackers to decrypt passwords and credit card information, so avoid using new or unknown sites for online transactions. So, be judicious not only in your expenditure, but especially so in your expenditure through credit cards. Remember that it is not only the amount that appears when you swipe, but also an added compound interest that you might finally end up paying if you are not able to afford the expenditure at that point of time. Use your credit cards judiciously; otherwise you will loose your credit worthiness. The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial Planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in
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