Credit Cards - What you should Know and Do?

Credit cards have their haters. I am not one of them.

In fact, they are quite useful if you know what to do with them. And to be fair, there is nothing right or wrong about using a credit card. It’s how you use them that decides whether you will have positive or negative or even catastrophic repercussions. 🙂

Now before you start searching for the best credit cards in India or begin comparing credit cards in India, more important is to understand what this animal is and how to tame it. You should first really understand how to use credit card smartly in India.

I have already written about why Credit Cards are Not Evil. I thought that I would write a little bit more about the topic.

Personally, I use credit cards myself. Don’t ask me for all the reasons. It’s very convenient and I always clear off the full dues before time. So I don’t pay any interest. So it works for me.

Related reading: How to choose the Best Credit Card in India?

Now if you were to ask me about Debit Card vs Credit Card, I would prefer credit cards as I am a little apprehensive about the fact that debit cards are linked to our bank accounts and if somebody were to get access to our bank details via debit card, they may do some serious damage to us. 😉 Of course there is no right answer to when to choose a debit card vs a credit card. It all boils down to your situation, preference and more importantly, whether you understand the pros and cons of both.

If you already are a credit card user, you will already know many of the things mentioned in this post.

But if you have questions like ‘how to use a credit card for the first time?’ in your mind, then I hope this post will be useful for you. So let’s move on.

Benefits of using Credit Cards India

1 – Interest-Free Credit Period – This is the biggest benefit. If you don’t know how it works, then here is a small example. Suppose your billing date is 15^th of the month. And your bill due date is 5^th of next month – i.e. about 20 days after bill generation date. So now if you make a purchase of let’s say Rs 10,000 on 17^th August, then this transaction will only get reflected in the bill generated on 15^th September. Since the bill has to be paid by 5^th October, you get about 49 days interest-free period between 17^th August and 5^th October. On the other hand, if you made the purchase instead on the 13^th of September, then you will only get 22 days (13^th Sept – 5^th Oct). So all transactions do not get the full interest-free period of about 50 days. Depending on the transaction date with respect to the billing date, the number of interest-free credit days will differ for each transaction. But nevertheless, this facility allows you to manage your finances and cash flows. This can be a useful facility for most people.

2 – Handling Emergency Situations – Most people can arrange money for emergencies (from savings, family, friends, etc.) in a couple of days. But what if the need is more urgent? Credit cards are useful in such cases. More so if you know that you do not have enough savings. A credit card allows you to take the money and use in emergencies and then figure out how to repay it later. And that is what is needed in emergencies.

3 – Reward Points & Cashbacks – I am not a big fan of these as these can psychologically force people to spend money unnecessarily. But it is still an added advantage. I generally use reward points to buy books via e-commerce sites. So good for me. 🙂

4 – Discounts – These again entice people to spend more money. But if you only stick to buying what you need, then discounts are a good thing to have. Isn’t it? Who doesn’t want them?

5 – Possibility of Interest-Free EMI – Many cards have tie-ups with various sellers and at times, allow you to convert your purchases into interest-free EMIs (at times with and at times without processing charges). This is helpful for people who want to spread large expenses over a period of a few months to reduce the burden on their monthly budgets.

6 – Credit Card usage helps build CIBIL Score – If you maintain a decent credit limit and % utilization of the credit limit, then slowly it will help you increase your credit score. But do not go for too many cards as this will seem like a credit-hungry behaviour to the rating agencies.

7 – Then there is the factor of operational efficiency that comes with credit cards. This factor in itself clinches the game for me.

Before you accuse me of painting too rosy a picture of credit cards, please understand that credit cards by themselves are neither good nor bad. If you use it irresponsibility, you will end up damaging your personal finances and future financial health. Having the discipline, using it only when you can pay it back fully, staying within reasonable % of credit limit, etc. is how this tool should be used.

But if you cannot do these, then the credit card is not for you. You should not have them. And you should not read the rest of this post. 🙂

Now if you are still with me, let’s move on…

How does Credit Card charge interest?

If you do not understand the mathematics of credit cards, you will not use it well. And if you don’t use it well, you will become a victim of mounting credit card debt. And that can be disastrous.

I will try to explain the maths of how credit cards calculate interest and how it works in as simple an example as possible.

But before we proceed, do remember and acknowledge this fact that the interest rate on credit cards is highest among all forms of credit facilities that are available to us. It can be as high as 40% annually or 3.5% monthly. Just read those interest rates again. For comparison, let me remind that a fixed deposit gives 6-7%, savings account 4-6% and equity gives about 12-15%. And with credit cards, you are paying 35-40%.

So with that understood, let’s understand a few terms that you should be aware of when using credit cards:

‘Interest-free period’ is the difference between the date of the transaction and due date of payment for that billing cycle. This period is obviously different for each transaction and during this period, you don’t have to pay any interest on your transaction – provided you pay the entire bill outstanding by the due date.

‘Minimum Amount Due’ (MAD) is the minimum amount that has to be paid by the due date. Paying at least MAD will ensure that you don’t pay any late payment fee and your credit card account will not be reported as irregular which can have an adverse impact on your credit score. But remember… by paying just the MAD, you will still not avoid interest on the unpaid amount (Full Due Amount minus MAD).

Let’s take a scenario now.

Assume the following:

Credit Card Bill is generated on 15^th of every month
Payment Due date is 6^th of every month
Interest charged is 3% per month

Here are the transactions:

Scenario 1: When Full Dues Cleared before Due Date

9-Aug – Purchase (Rs 20,000)
15-Aug – Bill generated (Outstanding-Rs 20,000; Minimum Amount Due-Rs 1000; Due Date-6^th Sep)
3-Sep – Payment (Rs 20,000)
15-Sep – Bill generated (Outstanding-NIL; Minimum Amount Due-NIL; Due Date-6^th Oct)

Scenario 2: When Full Dues Not Cleared before Due Date

9-Aug – Purchase (Rs 20,000)
15-Aug – Bill generated(Outstanding-Rs 20,000; Minimum Amount Due-Rs 1000; Due Date-6^th Sep)
3-Sep – Payment (Rs 1000) (Paid only Minimum Amount Due)

Now the statement that will be generated on 15-Sept, will have the following components:

Outstanding Amount = Rs 19,000 (Rs 20,000 – Rs 1000)
Interest@3%p.m. on Rs 20,000 from 9-Aug to 2-Sep = Rs XXX
Interest@3%p.m. on Rs 19,000 from 3-Sep to 15-Sep = Rs YYY

So the bill generated on 15-Sep will be of Rs 19,000 + XXX + YYY.

And that’s how to calculate Credit Card Interest. You can even find credit card interest rate calculators online.

And had you not paid the minimum amount due (MAD) of Rs 1000 before the due date (of 6-Sep), you would also have to pay an additional late fee.

As you can see, if you make regular and full payment to your credit card account, you can get interest-free credit. However, if you don’t make the full payment and/or pay only the Minimum Amount Due, you will not get any interest free credit period. Also, you will be charged a lot of interest till you clear it off. So if you are planning to just Keep Paying the Minimum Amount Due on credit card every month, then let me tell you that it’s a very bad decision. You will bear a lot of interest cost over the period in which you will be clearing the full outstanding. And if in between you keep making purchases, then those too will be added to overall outstanding and will be charged interest accordingly. This can easily spiral off into a debt disaster.

These are the very reasons why you should pay off your credit cards dues in full. Now you know the right answer to the stupid question ‘is it better to pay off the credit card or keep a balance?’ 🙂

So to repeat – it’s in your best interest to try and make credit card payments in full every month.

If for some temporary reasons you are unable to clear the full dues, make sure that you pay atleast the Minimum Amount Due. However, don’t make this your default option and clear off the full due as soon as possible.

So now you more or less know how to calculate interest on credit cards. I would suggest that you go through the ‘Most Important Terms & Conditions’ or MITC of your credit card. The MITC of your credit card clearly explains the methodology used to calculate interest with examples and have a lot of other important details.

Some Tips & How to pay off your Credit Card Debt?

You have your credit card. Few people already know the best ways to use credit card in India. 🙂

The basic principles are universal. But if you have doubts, then the questions you should be asking is to how best to utilize it without making the common mistakes that credit card users make.

Let me try and list down some tips or let’s say, best practices:

Always pay the credit card dues on time and before the statement due date.
Do everything possible to pay the full amount, on time and every time. If for some reason, you can’t do it occasionally, it’s fine. But if this becomes a regular thing, that means you are spending more than what you can afford. Stop using your credit card immediately.
This is linked to the above point. Try to pay in full. But if not, make sure you at least pay the Minimum Amount Due.
Do not use the full credit limit of your card every time. Every rupee you use, it is you and you alone who has to repay back. Some estimates say that using about 30% of your credit limit is considered to be healthy.
Credit cards offer attractive reward points and cashbacks. But that doesn’t mean you should use the card unnecessarily just to score some cashbacks or earn reward points.
To start with, just keep 1 credit card. That is sufficient for most people. But if you really have the need for another, then question yourself whether you are spending more than what you should be? Or if you want to have more cards due to your spending patterns and as many spend-specific cards can be actually beneficial, then do not go beyond 2-3 cards.
If you have two cards, try to keep the statement dates around 15 days apart. So, for example, Card#1 has a statement date of 15^th of the month and Card#2 has a statement date of 1^st of the month. Then if you want to optimize your spendings and make full use of the interest-free period, you should use the Card#1 for spending between the 1^st and 15^th of the month and use Card#2 for spending between 15^th and 31^st of the month.
If you unfortunately and somehow run up a huge credit card outstanding balance, then first of all, stop using the card. Next, liquidate some savings or borrow money from family, friends to clear the mess. Credit card interest rates are 30-40%. So you should get the mess cleaned before it becomes a personal finance disaster. You can even consider taking a personal loan which will be much cheaper than credit card debt.
If you are about to take a card, do pay attention to the joining and renewal fees. Some credit cards offer zero joining and renewal fees. But when looking for a credit card, pay attention to the fee structure alongwith the card’s benefits. Moreover, many cards allow a fee reversal if you spend a certain amount annually. Look out for these benefits and be prudent about it. Do not go after benefits which are not useful to you.
Some people are credit card reward point’s monsters! 🙂 They know how to take out the maximum benefit from their cards. Maybe you and I cannot be like them. But still, take time to understand the rewards structure. Maybe, it might work for you well.
Do check and verify your credit card statements every month. Scrutinize each item carefully to be sure that you are not been taken for a ride knowingly or unknowingly.
If you feel that a high credit limit is the reason you are unable to lower your card spends, then first of all, you are to be blamed. Go ahead and get your limit lowered. But remember, lowering of credit card limit may not be the solution. If your credit limit is reduced, your % utilization of the credit card will increase. And it will have a negative impact on your credit score. So better to control yourself.
Do not withdraw cash from ATM using credit cards. There is no interest-free credit period if you use your credit card to withdraw cash. You have to pay interest from the very first day and remember, the rates are exorbitantly high.
If you want to get a credit card but can’t get it, you can consider applying for Credit Cards against Fixed Deposits. This will help you build credit history and a decent credit score – which will be needed for future (bigger) loan applications when you apply for home loans, etc.

Since we have discussed enough best practices, let’s tackle just one major question – which many people having unmanageable levels of credit card debt would be asking.

Should you take a Personal Loan to pay your Credit Card Dues?

The mere fact that someone is asking this question means that they are in trouble.

If it is you, then first of all, you spent more than you could afford. You spent more than what you could repay immediately. You spent more than what you could repay after some time. You either don’t have savings to dip into or you don’t want to liquidate them. You may have also tried borrowing money from friends and relatives without success.

So you are here now.

A lot of credit card debt which you find it extremely difficult to service every month.

The realization might have now been there that handling credit card is not as easy as it seems and it is way too easy to overspend when using your credit card.

But there is a solution. It’s not perfect. But nevertheless a better one. And that solution is to take a small personal loan. It will act as a credit card debt consolidation loan – which will help you overcome your credit card dues at one go.

There is an obvious advantage of this strategy – A personal loan is way cheaper than the credit card interest rates. You can get personal loans at around 15-20% whereas credit card costs around 30-40%. And before you take a personal loan, you can check out personal loan EMI calculators that are easily available online.

Since you would have cleared your high-interest loan at one go, this will have a positive impact on your credit score. But beware – you still need to service the personal loan EMIs and if you fail to do so on schedule, you will once again receive negative vibes in your credit score.

Now those opting for this strategy must not forget that in spite of comparative cheapness of personal loan (when compared to Credit Card), the fact is that personal loans themselves are very costly loans. So this should be your last move after you have tried our all other options like reducing your expenses to pay more, liquidating some short-term savings, borrowing from your people, etc. And why you should aim to be loan-free? You already know how relieved you feel when that happens. Isn’t it? 🙂

Finally…

Credit cards are useful no doubt. But if you can’t manage its power well, then you should not keep it with you. They say with great power come greater responsibilities. 😉

I don’t have anything else to say after what I have already written.

Just be careful when using your credit cards, be sensible about your spendings and try to understand how credit card and credit card interest calculations work. Once you know it, you yourself will become extra careful about how to use credit cards and in fact, how to use credit cards smartly and wisely.

So is it good to have credit cards?

I have already written a few thousand words in this article and an earlier one. So I have nothing to add now. 🙂