Financial Literacy Week: Credit discipline should be taught young

February 12, 2021 6:02 PM

Since 2016, RBI has been conducting Financial Literacy Week every year to propagate financial education messages on a particular theme across the country.

Financial Literacy Week, Reserve Bank of India, RBI, Credit Discipline and Credit from Formal Institutions, credit, debtThe theme of this year's Financial Literacy Week is “Credit Discipline and Credit from Formal Institutions”.

By Rajan Bajaj, Founder & CEO, Slice

Since 2016, the Reserve Bank of India (RBI) has been conducting Financial Literacy Week every year to propagate financial education messages on a particular theme across the country. The theme of this year’s Financial Literacy Week is “Credit Discipline and Credit from Formal Institutions”.

I have always been a big advocate of the importance of financial literacy and I strongly believe that from educational to financial institutes, they should all do their bit in driving more awareness and education around good financial management. Which is another reason why RBI’s annual ‘Financial Literacy Week’ is a very good initiative which can potentially transform things ground up. And this year, their theme is the closest to my belief system – “Credit Discipline and Credit from Formal Institutions”. Here’s my two cents on it.

In our culture, ‘credit’ is frequently associated with ‘debt’. Financial information, from credit cards to investments, is an area that is perpetually surrounded by rumours, bad practices, and myths which give it a bad reputation. In reality, good credit discipline will not only grow your wealth but open up a plethora of opportunities in your future. Given the growing and accessible digital infrastructure and as one of the youngest populations in the world, India has an opportunity to build a highly empowered workforce.

As per a report published by Morgan Stanley in 2019, 46 per cent of India’s workforce consists of millennial and GenZ who contribute around 70 per cent of the household income, yet not enough importance and value is given to their financial literacy. Unlike the social norm of our country, credit discipline and good credit behaviour needs to be taught as soon as someone steps into the realm of financial independence. A financially intelligent young population will not only create personal wealth but also contribute holistically to the financial fabric of the country in turn strengthening the economy and other institutions.

RBI’s repeated emphasis on financial literacy driven by the theme of credit discipline this year needs to lead to an active conversation around early credit education and how that can prove to be viably effective. Myths and misinformation surrounding credit have plagued people for years. The truth is that a credit line is not the problem, unwise spending habits are. Credit can, infact, open up several possibilities. It allows you to not compromise on your dreams and to follow your passion. It also allows you to build a good credit score which can eventually lower your cost to borrow. And that could potentially mean saving lakhs of rupees in the future on your home, car, or education loan or even to start a business.

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In the backdrop of the ‘Financial Literacy Week 2021’, here are six tips, especially for youngsters, that will help bring credit discipline into your lives and help you make the most of your credit cards.

1. Find the right solution for yourself

Whether it’s a physical or virtual credit card, or a one-time buy now pay later option, it is essential that you do not blindly settle for the first option but take time and evaluate all your needs. To get you started, here are a few things you must check – annual fee terms, APR on paying minimum due amount, hidden fees, joining fee, process of rewards redemption and benefits.

2. Start low and grow

Don’t chase the sun and the moon when it comes to a credit limit on your cards. A credit limit that is 1-2x of your monthly spend is a good place to start when choosing a new card. Your credit limit is bound to grow as you maintain and demonstrate healthy credit behaviour. Focus on cultivating good credit discipline, especially with your first card, and the rest will fall into place.

3. Don’t shy away from your passbook

We love shopping but not looking at the final ‘damage’. Make checking your passbook a daily or weekly habit to stay in touch with your expenses. Some of the best credit solutions come with the best apps. They offer interactive passbooks and visual representations of your spending history. Get comfortable with the app of the solution you choose and thoroughly navigate and explore it. Check your balance and expenditure often. Not only will it help you stay on top of your spending, you’ll also be able to spot any fraudulent charges.

4. Let your goals lead the way

The biggest challenge with spending is identifying your real priorities. Don’t let your FOMO decide where you spend. Set goals for yourself in life and plan your budgets around it. If you wish to pursue photography, look for the best EMI solutions for your camera and plan your monthly expenses based on this. If you have set goals, then skipping a movie or a restaurant visit here and there will not be a problem. Cultivating right spending habits in the initial days of using a credit card can be a game changer and a healthy limit utilization will also help you build a better credit score.

5. Work towards building a good credit score

A crucial credit card lesson is that your card usage impacts your credit score. Credit score is an analysis of your ability to handle loans and other financial obligations. Responsible repayment is critical in defining your credit worthiness. Practice good credit habits like paying your dues on time, low card utilisation, using fewer cards etc., and you’ll see yourself building a good credit score.

6. Keep checking your rewards and points

Rewards are a big reason we sign up for a credit card in the first place. So it only makes sense that we get the most out of it. Check your points regularly and keep a tab on the new offers you are eligible for. Usually card providers will bring new offers to you every month, so keep checking their website or app periodically. Be careful when redeeming rewards as some providers end up charging a fee for that also. Go slow with the checkout process of reward redemption and keep reading terms and conditions to ensure you’re getting the best deal.

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