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Sunday, January 9, 2011

Why using a credit card makes sense

By Madhu T,ET Bureau

No credit cards, please — we are young and credit-averse. It seems, a small bunch of youngsters will do anything to resist a credit card being pushed into their wallet. Nita, a young mediaperson, for example, cringes every time someone in her group flashes his or her card to take care of the bill at a restaurant. She just can’t understand why anyone would opt for a credit card — an easy way to fall into a credit trap, according to her — to pay bills. Why not opt for a debit card to settle the bill instead, she would often confront her friends, much to their amusement. Not in a mood to get into longdrawn boring conversations about the merits of using credit cards, her friends would mutter key phrases like convenience, free credit period and so on. To cut the story short, Nita is yet to figure out why people keep collecting credit cards as if they are life-saving masks.

Increasingly, a small number of youngsters are consciously resisting the desire to own a credit card. Of course, they are far outnumbered by the flashy crowd of youngsters working for BPOs and KPOs, who live by credit cards and swear by easy credit.

“I don’t have any figures to support the claim, but it is true that more and more people are aware of using credit cards in a reckless manner. Many people are content with their debit cards and they are not comfortable with the idea of using credit cards to pay up their bills,” says a financial advisor. According to him, the older people in the group may have had a bad experience dealing with credit cards and they consciously stay away from further trouble. Kids, who have grown up hearing stories about the perils of easy credit, seem to have learnt early lessons in life and keep away from free credit cards for the rest of their life.

Nita, however, hasn’t heard any horror stories about credit card traps. But she knows that it is an expensive form of credit available and many people tend to accumulate huge debt, thanks to easy availability of credit. “When someone is using a credit card, Istart thinking how much money that person would have to pay at the end the month. The way people use their credit card, I am sure they have a huge outstanding at the end of the month,” she says. “I somehow also start thinking about the interest rate they would be paying to clear off the debt. That is why I have decided that I will not get into the habit of accumulating debt,” she says. However, Rita stays away from the credit card because of the lessons learnt the hard way early in life. She used her credit card (an add-on card her father gave her) as if there was no tomorrow and in no time she was in trouble. “I maxed up my credit card and my father had to bail me out. That is why I have decided that I am not going to use credit cards all my life,” says Rita.

However, according to financial experts, every tool – including the much abused credit card – has its plus and minus sides. They don’t think people should develop an irrational fear about this piece of plastic unless they think that they are incapable of responsible behaviour. “Credit cards are a useful payment mechanism and people don’t have to avoid them unless they feel they would be irresponsible when it comes to using them,” says Gaurav Mahruwala.

Sajag Sangvi, a certified financial planner (CFP), says the best thing a person can do is to stay away from using the credit card if s/he cannot resist the temptation to shop and go on revolving credit. “If you don’t clear your outstanding amount on the due date, you are in for trouble. Credit card companies charge around 36% interest on the outstanding amount, which is the highest form of credit,” he says.

For the financially-savvy, the convenience and free credit periods are literally the rewards for using credit cards. For example, a credit card gives you around 50 days of free credit period. Some cards offer even more time. This is the feature that tempts the financial geek. Imagine, you earn interest rates on savings deposit on a daily basis and some other entity is giving you free credit for that period.

“Free credit is a very good feature. It allows you to shop without bothering about the money in your account. The only thing you have to be particular about is to make sure that you clear off your dues on the specified date on which you are supposed to make the payment,” says Mashruwala. He also underscores the convenient factor: you don’t have to carry a lot of cash around to shop. Sure, you can use your debit cards at most places now, but some people don’t like the idea of using debit cards for shopping as it may expose their entire savings account. Also, some travel sites insist on a credit card to make reservations.

In short, you don’t have to avoid credit cards like a plague. All you have to do is to clear off the outstanding on the due date. However, if you fall for the revolving credit facility (that is, pay up a small part of the outstanding immediately and pay the rest later), rest assured you will hurtle towards a debt trap. Because the standing joke is that you can go on paying the credit till you are alive if you are only paying the minimum amount due every month.

Get Credit-Savvy

Credit cards are a useful payment mechanism as you don’t have to carry around much cash for your purchases They are especially useful for people who travel frequently within the country and abroad Credit card bills give you an insight into your spending behaviour at the end of the month or quarter They provide you a free credit period of around 50 days, which is extremely attractive If you think you can go overboard with your shopping and may fail to make full payment on the due date, avoid using credit cards If you are using credit cards as a financing tool, do remember that it is one of the most expensive forms of credit.

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