This week, Nikunj Gandhi speaks about the various benefits that come with being a credit card holder
Credit is not always a debt, it’s also a way to stall payment without losing any money. It’s always beneficial to have more than a couple of cards to derive the best out of them. Credit cards are a good way to make delayed payment in case the need is urgent but the money is not in hand. However, one should keep in mind few things while using credit cards as everything has its pros and cons.
Dates are important
All cards have a statement date/billing date and a due date. The due dates are worked on the basis of banks policy to provide you a credit period. In order to get a maximum credit period once a transaction has been incurred, it’s always best to remember the tentative due dates. I refer to tentative due dates since it’s too much of a hassle to remember the exact dates and plan your spendings accordingly. But it’s always helpful if you could segregate and remember the week in which the due date falls in order to enjoy the longest credit period. Most cards offer 30-55 days of credit period; the longer the better. So if you have a bunch of cards and face the dilemma as to which card to use, the thumb rule is to use the card whose due date is the furthest from the transaction date. That way, you can get the maximum credit period till repayment. Alternatively, the closer the due date, the shorter will be your credit period.
Your credit card spendings should be incurred on the basis of your liquidity and incomes, else you’ll just end up in a debt trap which the banks want you to end up in. So the spendings ought to be planned depending on the liquidity you maintain in your savings bank accounts or easily convertible liquid assets. This ensures that you can make timely payments. The banks also offer you modes of payments in the form of total amount due and the minimum amount due. The minimum amount due is calculated at usually 5% of your total spending in a billing cycle. This is also known as the revolving credit facility which the banks offer and can extend from a period of 3.5 to 5 years.
However, the power of compounding interest works against you in this instance. Banks have the prerogative of charging a hefty 2.5% per month to 4% per month interest which works out to a scandalous 30-48% annually on your outstanding amount, when you avail yourself of the revolving credit policy. Hence its always best never to default and always make payments on the basis of the total amount due. An example to the interest calculations is as follows:
Assume that your statement date is 2nd of every month and the due date is 22nd of every month. Say your statement was generated on February 2 with due date of February 22 and you paid the total amount due as per this statement on or before the due date. Additionally you made a purchase of Rs 4000 on 10 feb and your statement was generated on 2 mar with an outstanding of Rs 4000….you make the payment for your outstanding of Rs.4000 before the due date of March 22, no interest will be charged.
but say, you made just a part payment of Rs.1000 on 10 mar, then the interest shall be calculated in your next statement of April 2 as follows (assume 3% interest per month)
Rs.4000 balance for 30 days (February 10 – March 9)
4000 x 30 x 3%/30 = 120
Rs 3000 (outstanding balance) for 24 days (March 10 – April 2)
3000 x 27 x 3%/30 = 81
total interest charged = 201
Making only the minimum payment every month would result in the repayment stretching for say 5 years with consequent interest payment on your outstanding balance.
The point here being that the compounding interest, when it works against you, erodes your wealth like a parasite.
It’s always beneficial to pay about 4 working days prior to the due dates. The banks require that the payments be credited to their accounts as on the due dates, failing which they have the power to levy late payment charges.
Banks offer several repayment facilities for your card in the form of EMI facility, balance transfer facility, visa to visa transfer, cash advances against card etc. But they are all income generating gimmicks for the banks and can be absolutely avoided if you wish to keep transactions over your credit cards clean and simple. Processing fees itself on such facilities could run into a few thousands which could be avoided, unless necessary.
Foreign travel convenience
Credit cards offer a great convenience for foreign travel. The hassles of carrying liquid funds like cash, travellers’ cheques, forex card can be done away with and they could be used for spending just as in the home country. Banks charge about 3.5% over and above the prevailing foreign exchange rates. Also, they could be used as an ATM card for cash withdrawals. No doubt, fixed finance charges are levied for cash withdrawals, but a trade-off needs to be worked out over the convenience factor.
Speaking of cash withdrawals, using the credit card as an ATM card could incur hefty interest charges. The exorbitant interest rate remains the same as your outstanding credit rate, but you are deprived of the credit period in case of cash withdrawals. Hence your interest shall be calculated immediately from the next day onwards. Cash withdrawals over credit cards are to be availed only in case of an emergency and it is to be ensured that the payments are credited to the credit card account as soon as possible so as not to incur huge charges in interest.
In case if you have several cards, it’s always advisable to use them at least once in 6 months else you could be charged for keeping the cards in a dormant state. It’s beneficial to use the cards for your petrol payments. The 2% petrol surcharge waivers are offered by most cards for fuel expenses. Debit cards are not an alternative to credit cards. Although the convenience of usage are almost similar, the benefits differ a lot, the biggest of them being the credit period which could be availed.
Credit card websites can be used for paying all your utility bills online. This helps for an appropriate expense management and keeping a proper track for the records.
In case of a grievance, it’s always better to communicate with the customer care over emails, unless the matter is trivial. It helps in chronologically maintaining your evidence in case the dispute needs to be escalated further for redressal. Also, the customer care centers are compelled by quality checks to ensure an adequate response over the emails within a specific time frame.
One of the best incentives of the usage of credit cards is the Rewards Program they offer. As you keep using your card, depending upon the category of your card, you keep accumulating reward points. The banks offer a Rewards Program for the redemption of these reward points. The rewards offered differ, but the most common rewards are the gift coupons of various departmental stores. It’s equivalent to you being offered cash for using your credit cards.
Many departmental stores, in case of substantial purchases like say white goods, offer a 0% interest EMI facility or cashback offer for repayment on the basis of your creditworthiness evaluated from your credit cards. Considering the time value of money principle, it’s always beneficial to avail yourself of such facilities offered.
Nikunj Gandhi is an Equity Investor and can be reached at [email protected]. These are his opinions and not necessarily of the newspaper’s.