Credit Cards: The Good, The Bad, The Ugly.
We have all been there. Credit card bill too high to pay off, paying the minimum and rolling over the debt. Soon, the card bill is far higher than you ever imagined.
How did that happen? You cut up the card and swear never to use a credit card again.
Never again, until the next time!
Let me try to capture the good bad and ugly side of credit cards here.
The good:
Credit cards are extremely useful, when used judiciously.
Expense consolidation: route all household expenses through one source, it helps to track and have a good idea of how much you are spending and where. Every card spend is tracked via an SMS to your smartphone (Expense Tracking). This makes it simple to keep track. Use add-on cards for other members of the family who do their own household purchasing.
Discounts, Cash Back & Loyalty Points: Who does not like a discount or to get money back when they shop. With this consolidation, there is also the opportunity to get discounts on purchases. Ecommerce sites and even large stores often run cashback offers on credit card spends. I have usually managed to get 5% cashback on online purchases.
Loyalty points are a big pull for me. Pre-pandemic we used the points for flight tickets. Now we are using the points for basic shopping. It is like more cashback.
Of course, there are other advantages depending on the kind of card. For instance, some cards give you a concierge service – someone who will hunt deals on your behalf and save you time. Priority Pass, access to airport lounges, is a big advantage, especially for frequent travellers. Insurance on credit card purchases (not applicable for all cards) is a good one too.
Not to mention the days of free credit – up to 45 (As advertised by some cards)
The Bad:
Fees: Many cards lure customers in with a free first year. If you are watchful, in most cases, you can get your annual fees waived. Also, some cards have a minimum threshold of spend beyond which there is no fee. The consolidation of expenses helps here for sure. Fees range from Rs. 250 for some cards, right up to Rs. 10,000 for something like the Diners Black.
The benefits vary significantly, and you should do comparison shopping here as you would do anywhere else. Websites like paisa bazaar and bank bazaar help with such comparisons.
Interest: The cards charge a seriously high rate of interest. The Diners black mentioned above charges 1.99% per month (that translates to 23.88% per annum). Something like the SBI Simply Click card which charges an annual fee of 499 will charge an interest of up to 3.5% per month (a whopping 42% per annum). There are cards that go up to 45% per annum (Citibank cashback card).
No wonder the banks are keen on getting customers for their credit cards and offer all form of enticements.
Credit Rating: Cards are a double-edged sword where credit ratings are concerned. If you are diligent and always pay your cards on time and don’t use the total available credit etc. you can improve your credit score. If you are not that disciplined, then it can really hurt your credit score very quickly. This will affect future financial transactions you want to undertake such as home loans or any other loans.
The Ugly:
Minimum or part payments: Here is a less publicized fact. Even if you make a part payment to the card, they will charge you interest on the entire sum for the period concerned. I find this aspect is known to very few people. The below text is what I find in my card statement.
“If the minimum amount due or part amount less than the total amount due is paid, interest charges are applicable (including fresh purchases, if any) on an average daily reducing balance method.”
What this translates to is, the interest will be charged on your outstanding amounts from the day you spent that money on your card. It also means interest will be charged on new purchase from the day you spend it on the card. You no longer get that 45-day free credit if you have balance unpaid.
At 23% to 45% per annum interest, that is a very high charge.
Here are two things to NEVER do
- Never rollover balance: As seen above this can cost up to 45% annual interest, even on new purchases
- Never withdraw cash using your credit card: there is a charge upfront for doing this (minimum Rs. 250 to Rs. 500) and an interest which can go up to 45% annualized.
Some other things to avoid:
Spending close to your full limit: This can adversely affect your limit, even if you pay it off on time. Be aware and don’t use anything more than 75% of your card limit. Every time your card sends you an offer to increase your credit limit, accept the offer. Just don’t use that extra credit limit.
Ignoring your statement: You need to spend a few minutes glancing through your statement to ensure you don’t have any hidden charges there. Some years ago the card companies had perpetrated a simple fraud. They added insurance premium in the card statement. If called them, they would take remove the charge. If you did not, well you got insurance you never asked for and you paid the premium for it.
Of course, with apps like CRED nowadays you can get alerted to additional charges on your card without opening your statement yourself. You are exchanging personal data for convenience! It is a choice to make.
In summary, I would say the Credit Card is a tool, a very good and sharp tool. It is very beneficial to the person who knows how to use it. For the one who cannot resist the temptation to swipe the card without thinking through consequences, well it can cut deep.
Know who you are first, then decide whether it is a tool for you.
