Swipe with caution

Source: The Business line

Plastic money has gone a long way in re-moulding consumer buying behaviour. With a credit card, you can buy whatever you want without having to pay then and there. Making money-less purchases has considerably altered people's spending behaviour, especially of the middle-class. Accepted across a wide category of outlets, the credit card's USP is that it is convenient, and also offers the flexibility of paying a small amount and the rest later (with the oft-ignored interest). Today, holding multiple cards has become common. Credit-card issuers, with hard-selling promos and freebies, often lure you to go in for new cards and dangle the carrot of migrating from one type to another. And soon, you may find yourself in the platinum or gold club, for the sake of winning special gifts! And, then, comes the offer for enhancing your credit limit and, with it, a lot of trouble. As you do not count out money, you are tempted to spend more, often overshooting the credit limit.
Pay time can be devastating. If you fail to clear the entire balance, the credit-card issuer charges an interest, any where between 2.5 per cent and 2.95 per cent from the date of your purchase, depending on the terms of the card. Consider the plight of a friend, who recently bought a dream house. Overshooting the budget, he had used up all the resources, and had no fall-back for any emergencies. For all the unexpected expenditure, he swiped a couple of credit cards; soon enough they were fully loaded. Then, month after month, he took recourse to the revolving credit, at 2.95 per cent a throw, till a maturing insurance policy, bailed him out.

The plastic card
It is best not to have multiple credit cards. Second, avoid increasing the credit limit unless it is really warranted. In the event of losing your card, the higher credit limit would only increase your liability unless you inform the card-issuer on time. Further, what is more painful is the heavy charges levied on cash withdrawals. If you withdraw cash using your credit card, you may end up paying close to 5.25 per cent on the amount as transaction cost (one-time charge of 2.5 per cent and 2.95 per cent as interest). If you have taken additional cards for your dependants, such as children, ensure that the credit limit is controlled based on your risk appetite.
Protect your liability
Always make it a point to store your card number in your mobile along with the telephone numbers of the issuing company. This will come in handy in the event of your cards being lost.
Try and enjoy the benefits that come with the card without getting trapped in debt.

Why is a credit card expensive?

The Economic Times, Thursday, November 02,2006

Ever wondered why the average rate of interest on credit cards is around 34% per year, when the average rate on a home loan and personal loan is around 10% and 18% per annum, respectively?

“One reason is the higher risk of default that banks carry due to the completely unsecured nature of the credit card product,” says Harsh Roonta, CEO, Apnaloan.com.

“For example, in the US, the average interest rate for a 30-year fixed rate home loan is around 6% whereas the average credit card interest rate is around 14%. This means that, in the US, a credit card is about 2.3 times more expensive than a home loan on an average. “In comparison, in India a credit card (at an average rate of 34%) is about 3.2 times more expensive than a home loan (at an average rate of 10.5%),” says Roongta. “Yet, the lowest interest rate in the US on a credit card is around 7.5%, which is not that far removed from the home loan rate. In India, the lowest credit card rate is around 20%, which is still twice the home loan rate.”

According Roongta, there are various reasons for this anomaly: The Indian rates are distorted because of the 12.24% service tax on the interest charged on a credit card—mercifully , this is not charged on the interest payable on any other kind of loan. Indian banks tend to charge the same rate for all credit card consumers irrespective of their credit profiles.

However, this situation will correct itself to some extent in the future, as rate differentiation depending on payment history is now beginning to make its presence felt. The biggest reason for the higher rates is the relative price inelasticity of borrowing through a credit card. Simply put, the kind of consumers who use a credit card to borrow, care more about the convenience. They are either ignorant of the actual interest rates charged or prefer to ignore it, hoping to pay off the borrowing quickly. Since the actual sums borrowed on a credit card are normally small (around Rs 25,000 to Rs 50,000), the total interest even at 34% per annum works out to Rs 800 - Rs 1,500 per month. Since the absolute amount looks small, consumers rarely bother about calculating the actual interest rate.

An interesting fact is that if you spend Rs 50,000 on a credit card and only pay off the minimum 5% due every month, then at 34% annual interest, it will take you about 11 years to completely pay off the amount! And the total interest payable over those 11 years would be Rs 57,000. So what are the lessons for a regular consumer? “A credit card is a useful instrument as a means of payment. But it should be used as a borrowing tool very sparingly and for as short a time as possible. In fact, if you are unable to repay the total amount due on your credit card, it’s better to take a personal loan (which is much cheaper) to pay off the dues,” says Roongta.

Managing credit card dues

The Economic Times, Friday 3rd November.2006

Do you see a high balance on your credit card statement? Do you carry credit card dues to the next billing cycle? Credit card dues and associated penalties are very fast to accrue and very difficult to dissolve. This is because the interest rates on them are exceptionally high - to the tune of 20 to 24 per cent.

Many mismanage their cards and end up in a debt trap. The convenience of not having to carry cash around and tremendous purchase power in your wallet, has contributed to increasing popularity of credit cards. But many people who make lavish purchases and generously swipe their cards, tend to forget that they are living on borrowed money. And money borrowed must be repaid if not now, in the next billing cycle. Credit card interest rates on late payments are very high.

Competition among banks compels them to waive off annual fees and other obvious expenses. However, credit card companies must make money and pay commissions to their agents to stay alive. From where do they get this money? They recover it in the form of penalties, late payment charges and fees. Some companies totally block your card if you fail to make monthly repayments. Others expect a minimum monthly payment to keep your card active, while penalties keep accruing. On spending in excess of this limit, banks do charge a penalty. It could be a percentage of the amount that you’ve exceeded by, above your stipulated limit. Say you write a cheque and it bounces. What happens? A cheque bounce charge of around Rs 250 will appear on your statement. It has been studied that credit card users spend about 10 to 12 percent more on items than buyers who pay with cash. Establish a monthly budget to curb your spending. Treat your credit card like cash, deducting from your money account the purchases you make with your card. This way you’ll never be in a situation where there aren’t enough funds to payback the lender. Pay the entire balance each month. Never carry a credit card balance. Regularly paying your monthly bills will ensure that you do not cough up high interest rates and heavy late payment fees. If you find your credit card dues difficult to manage, it is better to change your spending habits. Contact your creditors immediately if you’re having trouble making payments. Tell them why it’s difficult for you, and try to work out a modified payment plan that reduces your payments to a more manageable level.

Ways to get best out of your credit card

With the number of credit cards in India crossing 20 million, most middle-class individuals have access to a credit card. However, intense competition and a multiplicity of offers have made selecting a card a much more complex process than it was in the past. While it is natural to select a card based on one’s card habits, it also makes sense in some cases to alter one’s spending patterns to get the best out of the card. Here are 10 suggestions on how to get the best out of your piece of plastic.
Free for life is not free
Whether you do not have any card or already hold half a dozen, chances are that you will receive dozens of free offers at shopping malls, petrol pumps and even railway stations. Do not accumulate cards, even if they are free for life. Even if you do not transact, you may still incur liability merely by losing a card and asking for it to be hot-listed.
Co-branded cards may have little value
There are several dozen co-branded cards in the market. Banks have issued cards in association with oil companies, airlines, supermarkets, hotels, telecom, educational institutions, charitable trusts and insurance companies among others. The purpose of a card is to have a single payment mechanism for all establishments and multiple cards defeat this purpose. Besides, most people would be buying airline tickets probably once or twice a year. Go for that co-branded card where you are likely to transact the most, not the one where you get the biggest discount. It is not without reason that co branded cards with oil companies have the highest volume.
Gold is not the best
The days when possession of a gold card symbolised a high standing achievement through success are gone. With banks being more and more liberal in issuing gold cards the snob value has been substantially eroded. For the cardholder too, the gold card provides little value since the offers are mostly in the form of discounts on high-end hotels, esoteric destinations and luxury goods which may not be on the shopping list of middle-class buyers.
Besides, if you could afford such stuff you would not be looking for deals anyway. Also, the annual charges on gold cards are much higher.
Points can be misleading
Most banks offer points for every Rs 100 of purchase. Some banks try to lure potential customers by offering higher points than their rivals. But, it is important to know what these points translate into before making it a basis of choice. For instance, a card which offers a Rs 300 gift voucher for 500 points is clearly misleading customers.
Never use your credit card for credit
This is the golden rule of personal finance which has not changed over the years. It holds true even if you desperately need to buy something and do not have the means to go for a personal loan. Interest rates on credit cards are more than double the rates on a personal loan. Your card company may tempt you with a higher credit limit, but, ultimately it is the cardholder who has to foot the bill. The same goes for withdrawal of cash from ATMs using one’s credit card.
Widen your card usage
Reward points on card spends act as hidden persuaders at times, sub-consciously goading cardholders to spend more to increase points. It is possible to maximise points without increasing monthly expenditure by using one’s cards for payments where traditionally one has been paying by cheque or cash. Several cell phone companies and insurance companies are now accepting card payments without imposing a surcharge. By using your card for such payments you will not only gain more points but also get advantage of the free credit period.
Last day payments
Last day payments are best avoided as the cost of missing out is much higher than the credit that you get for a couple of days. Besides, last day payments often lead to billing disputes as card companies assume the date of payment based on the date the cheque has been credited. If the last day falls just before a series of holidays there could be a problem. However, card companies have to accept the date of deposit as the date of payment. As long as you have dropped the cheque on the due date you are within your rights to demand cancellation of the late fee charges imposed for the cheque being credited late.
Reminders
Technology now enables banks to automatically sms text messages for due date reminder, notification of payment received or confirmation of large transactions. The last is particularly helpful as it lets you know immediately if your card is being misused. Most banks offer this service free.
Buying insurance
Card companies are best placed to offer excellent deals on products and services where the intermediation cost is high. In services such as health insurance the discount offered to cardholders is substantial. If the cardholder does not hold any health cover, such schemes are an affordable option. But, there have been several service issues in the past since the card company does not help if there is a claim and cardholders have to deal directly with the insurer who may be located at a distant place. Besides, in health long-term relationships make a difference because insurers tend to raise issue of pre-existing diseases whenever there is a claim on a new policy.
Security
Always retain the transaction slip until you receive your monthly statement. Strike a line across blank spaces on charge slips to ensure that the amount can’t be changed. Keep a separate record of your card numbers, expiry dates and helpline numbers to report a loss quickly. If you have multiple cards, particularly co-branded cards carry only the card you will use that day.