My money: Credit card buzz

Vijay C Roy

Chandigarh-based Harpreet Kaur, a sales professional, wanted to buy an iPhone 15 Plus (128 GB) costing Rs 84,900 from a popular e-commerce website. Considering her takeaway salary, it was out of reach for her. When she realised that the e-commerce platform was offering equated monthly instalments (EMIs) on the credit card, she opted for 12-month EMIs. It cost her Rs 7,662.93 per month. She paid the first instalment instantly.

From paying utility bills to buying consumer durables to travel, consumers in India are swiping credit cards almost everywhere. According to experts, zero down payment, no-cost EMIs and pay-later options have played a key role in driving consumer sentiment. As a result, the issuance of credit cards is on a growth trajectory.

Be careful

• Always pay credit card bills on time and in full.
• Follow financial discipline, wait for exciting offers.
• Plan transactions according to interest-free period.
• Use credit cards to build a good credit score.
• Avoid withdrawing cash from ATM using credit card.

According to the Reserve Bank of India (RBI) data, as of December 2023, there were 9.79 crore credit cards in circulation in the country, with a record 19 lakh additions during the month alone. The calendar year 2023 saw an addition of 1.67 crore credit cards, a significant increase from the 1.22 crore added in 2022. This uptick was driven by a combination of a sustained push from banks and evolving consumer spending patterns.

There’s a downside too. If on one hand the usage is increasing, so are the defaults. Credit card defaults rose by Rs 951 crore to Rs 4,073 crore in FY23 from Rs 3,122 crore in FY22. The rise in credit defaults is due to a number of factors, including the rising cost of living, job losses, economic slowdown and most important, the lack of financial discipline.

A credit card default happens when the customers fail to make the minimum payment towards the credit card for about six months in a row. The default can impact a customer’s credit score and the bank can even cancel the card.

Since credit cards have become one of the most convenient ways to pay, it’s imperative for consumers to use it prudently and derive maximum benefits out of it, lest it becomes a burden.

Time your purchases

Normally, credit card gives you interest-free days varying from 45 to 50 days, depending on the card. Also, each credit card has its own billing cycle. For example, if the consumer makes a purchase just after the credit card bill is generated, he or she can enjoy up to 50 interest-free days.

Pay your bill in full

When a customer pays his or her entire bill and within the stipulated time, they avoid the interest, which can range from a whopping 38 to 42 per cent on the outstanding amount. This will also improve CIBIL or credit score, which is extremely beneficial. Also, this can lead to a range of additional benefits, such as the bank offering more limit on the credit card and offers such as pre-approved personal loans.

Large purchases as EMIs

Banks offer convenient ways to pay back credit card bills — through EMIs, for example. If you think you are not able to pay the full amount due to unforeseen circumstances, the customers can convert their outstanding dues into EMIs. Depending on their repayment capacity, they can choose the tenure or selected transaction or the entire amount if the bank is offering EMIs on that. This can be helpful, as the interest rate of such EMIs ranges between 12 per cent and 24 per cent, which is much less than the finance charges levied on outstanding dues, which can go up to 42 per cent, depending on the banks.

Use it like debit card

Be prudent about credit card usage. Opt for an amount which you can easily pay rather than utilising the entire limit offered on the credit card which you cannot pay. This requires regular monitoring of your credit card and keeping track of spending. One can even set limits on credit card in order to avoid any overspending.

Transfer to other card

This option allows the cardholder to transfer the outstanding balance of the existing credit card to another credit card at a lower interest rate. This is especially helpful if the existing card issuer refuses to convert the dues into EMIs or does not offer the facility. The bank or other card issuer of the transferee card usually offers a promotional interest period during which it charges a lower or even zero interest rate on the balance transferred.

Seek low-cost loan

The interest rates of personal loans, gold loans, etc, are much lower than credit card finance charges, which can go up to 42 per cent. Therefore, it makes sense to take a low-cost loan to pay for outstanding credit card dues. If you are getting a personal loan at relatively lower interest rates, then you can consider that too. Credit card users with piled-up debt can also opt for secured loans like gold loans and loans against securities as their interest rates are much lower than the credit card finance charges.

Low-yield investments

The finance charges of unpaid credit card balances are way higher than interest rates applicable on fixed income products like fixed deposits or bonds. So, it’s prudent to liquidate low-yield investment to repay credit card debt as the interest rates charged by credit cards on outstanding dues are way higher than the interest offered on fixed deposits.