Credit cards can turn out to be your best friend if used properly. But they are also ruining the finances of millions, and how!
A credit card allows you to live on future income, which can entice you to live tomorrow’s dreams today, thereby putting you in a financial mess. And that is what the credit card business is all about.
Credit card issuing banks and NBFCs do not make money when you pay up your entire card expenditure amount diligently by the due date. They make loads of money when you roll your credit. And you are forced to roll your credit when you spend more than you can afford to pay within a credit cycle.
As of last count, India had in excess of 30 million credit cards in circulation.
There are many instances when people have found themselves in debt traps for failing to use their credit cards prudently. Also, some people tend to take multiple ‘free’ credit cards, which are easily available, which proves to be the first step to land yourself in a debt trap.
One doesn’t need to own more than 2-3 credit cards. One should use credit cards depending on the credit limit, the billing cycle of your credit card and the spending mode. One should not possess more than three credit cards, where two of them should be with minimal credit limit and only one should have the maximum limit.
One credit card is enough for an individual, unless you are a frequent traveller. If that is the case, then one national and one international card should do fine, says a veteran Mumbai-based financial planner.
The mantra with credit cards is to spend only what you can pay entirely before the due date. A credit card is like a loan, which is interest free if you make your payment timely. One should never revolve the credit or pay the minimum amount due only, as that allows banks to start squeezing you with interest, which is often as high as 48 per cent per annum.
Hence, after a period, interest accumulates and despite paying partial dues, you find yourself in the same position, failing to clear the dues. Financial advisers say if you tend to be a defaulter and cannot pay dues on time, then it is better to opt for a personal loan. At least that will not spoil your credibility in the market.
One shouldn’t unnecessarily take many credit cards. I think one should own 1-2 credit cards to have different billing cycles. One should make sure that the cyclical payments match the earning level of the person, says the financial planner.
Banks allow an individual to have any number of credit cards. It all depends on an individual’s requirements. If a person uses his credit cards to spend more on grocery, he should opt for a grocery card. In case of more travel-based expenditure, one can opt for travel card to get discounts.
Credit Cards are any day a useful financial instrument as you can plan your future payouts by utilising the credit-free periods, as long as you would know your cash flow status on the due date for payment.
However, the mantra for not falling into a debt trap and using a credit card regularly is discipline. Credit card can turn out to be your best buddy in need, as you get a free credit ranging from 10-50 days without paying interest. But just remember to be prudent with this buddy of yours.