Credit Card: Cards up your sleeve

Sep 05 2014, 04:43 IST
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SummaryThe double-edged sword of credit cards calls for precaution and discipline at all stages — even when you close one

A credit card makes things convenient for the user, enabling him to spend money he doesn’t have. But banks are now getting increasingly cautious in

issuing new cards because of rising defaults. They are undertaking more rigorous credit checks and are wary of issuing one to those who already hold quite a few.

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Credit cards are useful when one makes high-value transactions and the bank offers benefits in the form of rewards or cashback. Data from the Reserve Bank of India (RBI) show that during 2013-14, 509 million transactions, valued at R1,53,990 crore, were done through credit cards while 619 million transactions, valued at R95,400 crore, were done through debit cards.

A card user must keep in mind that rolling credit by paying the minimum amount due is not a good idea as banks charge an interest rate ranging between 35% and 42% per annum, depending on one’s spend, payback and utilisation patterns.

At the time of deciding on the card, one must analyse the kind of spend that will incur during the year.

If one is a frequent flyer, it makes sense to opt for a co-branded card. Or, if one uses credit card frequently at a particular retail outlet, the retail outlet co-branded card can be helpful as it can fetch additional loyalty points, which can be encashed at a later point.

So, before going in for a card, one should work out a cost-benefit analysis based on one’s expenditure patterns and frequency.

Most card issuers give a credit window of 4-5 weeks from the day of spend to the date of the billing cycle. Over that particular period, credit card spend is like an interest-free loan, which can be useful for the borrower as long as he repays the amount before the due date.

The monthly payment should at least cover the minimum amount due, which is usually calculated as 5% of one's balance outstanding, or the sum of all installments, interest/other bank charges and the amount utilised over the credit limit, if any.

In fact, rolling credit is a lot more expensive than even a personal loan, which can be availed at 15-20% per annum. Moreover, some banks charge an annual fee just to keep the card active — this is especially true of cards that offer special privileges and loyalty points.

Also, card issuers levy charges such as cash advance fees, late payment charges, ECS/cheque

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