POSTED BY March 11, 2010 COMMENTS (218)ON
Credit cards are becoming increasingly common in India, and while they come with a lot of convenience, the high interest rates and other charges mean that you have to be careful about how you use them.
In this post, we look at 5 tips on wise credit card usage, and how following them, can save you a whole lot of financial heartache. These 5 tips are pretty logical & self-evident; we have to understand that the free credit we get from a credit card is not really free. It’s actually a business for Credit card companies and hence somewhere in the whole process, they have to have a way to make money .
1. Pay your balance in full: This one is so basic, I was not going to point it out at all, but on second thought – I realized that this should really be the first point. Of all the loans you take, credit cards come with the highest interest rates. If you run a credit card balance every month, then the interest charges add up really quickly. If you have a balance on your credit card, pay it off in full before the next due date. This ensures that you don’t pay interest on your balance, which really is extra money you can keep to invest and build savings for yourself.
Curiously enough, I know of people who don’t pay off their credit card balance in full, but at the same time, put their money in low yield investments. This is
really bad math
. If you have a credit card balance that is charged at about 30% per annum and an investment that gives you just an 8% return – you are much better off paying the entire credit card balance before you even think of investing your money. The extra interest you pay on your outstanding balance offsets any interest income you receive from your investment. If you run a balance, realize, it normally is a strong indication that you are spending beyond your means. This is a bad financial habit that you should get rid of as soon as possible.
2. Avoid credit cards with annual fee: Unless you have a specific benefit in mind, from the credit card, don’t get a card that has an annual fee. It is always good, to get a credit card with no annual fee, because then the only expense you have on it, is the interest payment; and if you pay off your balance in full every month – you don’t pay any interest and your credit card will, in effect, be free! Add to that, the fact, that even most free credit cards have some sort of a reward program, you can benefit from. Why pay for something when you can get it free?
The other thing to keep in mind, while evaluating the fee, is how likely you are to benefit on it, based on your usage. I reviewed the HDFC Value Plus Cash Back credit card a few months ago, which had an annual fee of Rs. 700 and up to 5% cash back. At a cursory glance, it seemed to me that Rs.700 may not be very high due to the cash back, but a deeper look at the terms and conditions told me, that the cash back will only be credited to your account if the monthly balance is over Rs.10,000. I realized the card was not meant for people like me, who aren’t likely to run up such a balance on their credit card every month.
Bottom-line: If you are going for a credit card that has an annual fee – make sure you go through the fine print and are certain it will be worth the cost to you.
3. Get a credit card that is easy to pay off: I used to have an ICICI credit card and a SBI credit card. Both of them had similar features, but the ICICI card was really easy for me to pay off, as I had an existing ICICI Bank account, and the credit card was linked to it online. All I had to do, was go online, and pay off the credit card balance, through my ICICI login. As a result, I ended up using the ICICI credit card a lot more than the SBI one. Ease of payment, means that I can pay off the balance very often, very easily, and rarely run the risk of late fees or interest charges. While thinking of which credit card to apply for – consider just how easy it is, to make a payment on it.
This might sound like a trivial thing now, but you’d kick yourself later, if you had to pay late fees just because you lost your cheque book, or were too busy with your work to go to the bank and deposit the cheque. In fact, I’d go on to suggest that you add payment reminders on your email, phone or even a little post it on your refrigerator. Life gets busy sometimes, and a little help can go a long way in saving you late fee and interest payments.
4. Keep a track of your statement: A few years ago I went through my credit card statement online and saw that there were some charges from an unknown merchant. I was pretty sure, I had not bought anything from them, and I called up customer care to know what the charges were all about. I was put on hold for a long time, and couldn’t get through. However, the next day, I noticed that the merchant had reversed the transaction, and I even had a small credit from them.
While I was lucky in this case, there is no guarantee that credit cards won’t get abused. Always keep track of your monthly statement. If you can go online and check your transactions – that is even better, because you don’t have to wait until the end of the billing period. I go online every week or so and check up on my credit card statement to make sure no unauthorized use is happening.
5. Don’t use your credit card as an ATM: By this, I don’t mean that you shouldn’t use your credit card at the ATM, (although you should really, really avoid it as far as possible). What I mean is, there’s a tendency to withdraw cash from your credit card (since it’s so convenient) and that’s pretty addictive. Treating your credit card as an easy, reliable, access to cash will not help you in the long run. For one, the interest rates on cash withdrawals are generally much higher, and if you get into this habit, – you will run up high outstanding balances pretty quickly.
The cash advance limit, is also generally, a lot less, than the overall credit limit, so it won’t get you very far, anyway. The interest will keep adding up and grow very quickly. Withdrawing cash from your credit card should really be the last option . Usually, cash withdrawals come with some sort of cash advance charges, and more than that if you regularly withdraw cash from your credit card – again, it indicates a tendency to overspend and go beyond your means. This really means, that your personal finances are going down-hill.[ad#big-banner]
Read a Customer review on Mouthshut
I have saved all my friends by sharing my horrible experiences with ICICI Credit Cards.The customer care people are polite only till the greetings other wise they behave and speak like a criminal and very sarcastically. I have been using it for 2 years. But the customer care behavior problem is consistent. Normally I have been paying them always on time and the bill is normally above RS 5000. But once (3 months back) I had to go outstation suddenly and missed the pay date for first time for a day or two. The amount this time was also very low (maybe 1500 or 1800) as compared to other months bills. I suddenly started getting calls from a HORRIBLY SPEAKING customer care lady. When I mentioned I am travelling and will not be able to pay for another 2 days as my journey is a 3 day journey she started abusing and threatening me. She even mentioned that by tomorrow morning if I will not arrange for the payment she will send some one to my home for payment, when I said this is rubbish and she should not speak like this she started shouting and said “I will send someone and can do anything if not payed by tomorrow and reminded me that if I will not pick this call after seeing her number further she will be worse”. Is this is the way a bank should treat a long time and good customer? I have stopped using the card from that day. [ LINK ]
Credit Card Mistakes [Video]
The overarching theme of these tips is, “Get the convenience of credit cards for free.” That’s what it really boils down to.
To me, credit cards make shopping convenient and that is a big benefit, but at the same time, they also tempt me to go beyond my means, and then pay extra by way of interest. The key is to get the benefit of convenience but not have to pay anything for it. The above tips will help you do both, or at the very least – strike a balance between the two. What do you think? Have I missed out any obvious tips or is there something you’d like to add, based on your experiences?
Comments please ? Leave your comment to provide another tip 🙂 and let us know what you think about Credit cards .
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