“If you owe the bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem,” - Jean Paul Getty, US industrialist.
This is because of the simple underlying fact, that money owed to your bank or any moneylender is nothing but a loan on your head. Even if you have spend money through a credit card! Credit card is an alternative payment option and not an alternate currency. So, if not today; you do need to pay later for the goods purchased by you.
Thus, it is important for you to manage your finances well such that these liabilities do not become a major headache for you and your family in future.
Easy Credit’s Hard Facts
Credit is easily available nowadays. Most of you are carrying at least one credit card, and have been tempted to take a personal credit loan. The advertisements for such credit products are so seductive that they make you feel like a loser if you do not take the credit card, and go out and spend, spend, spend.
The only glitch in spending on credit is that you have to pay it back. And the amount is usually much more than the cost of your purchases because of the interest which you have to pay. Not convinced? Then let us do some math that may put you off and keep a tab on your unnecessary credit for good.
How much are you getting charged?
Credit cards charge at least about 2% interest a month. That means 24% a year. It means that the INR10,000 TV which you bought with your credit card will cost you a total of INR 12,400 if you paid the bill at the end of the year. Plus, the late payment fees, in case you are unable to make your credit card payments on time so roughly you would be paying INR15,000. Now, you have paid 50% more!
Credit card companies provide you with pre-approved credit lines and generally does not ask too many questions. Most people like us take these offers without realizing the true cost of the credit, and then struggle with the monthly payments. Would it be possible for you to pay for that TV or that holiday if you had just saved a little instead of putting it on credit? If you could, then you should have, because you would have saved a bundle.
These are series of advertisements in magazines and papers that keep telling you that every successful individual has personal credit. However, they do not tell you that you need it to get by a tough life situation. All tell you s that you need it to buy that prized painting, or join that country club, or buy a tree, or to have a foreign holiday.
Banks charge about 20% per annum for personal credit. This is better than the credit card. That INR10,000 TV would cost you only INR 12,000 if you paid at the end of the year with personal credit. However, paying an additional INR 2, 000 is a burden too. The average Indian pay hike is well below 20%. Moreover, paying 20% for credit still means that most personal loan borrowers are living above their means.
What are you really buying?
Check yourself every time you feel you must have something that you really do not need or you cannot afford. The ‘More Money Less Stress’ way is to buy only what you can pay for without borrowing. Credit debt is a case of ‘pawning’ the future to pay for the present. You may buy that thing and be gratified now, but you become a slave to it for the next few years.
And with debt on your head, you are not free. You may be angry at your new boss and want to quit, but you think “I have not finish paying my credit debt yet”, and you bear it and stay put.
You are being rated!
Whenever you pay or miss out on your credit payments, you are being rated by your bank. This tracking known as credit score is a tool used by banks to evaluate their good and bad borrowers. Moreover, a credit score affects all your loan requirements for home, car and even, student loan.
Credit Information Bureau of India Ltd (CIBIL) is an independent body that keeps a record of credit history of customers who have availed credit in the past. Plus, the data is shared across banks!
For example, Rahul was a customer with XYZ bank and worked with a multinational company. Although Rahul maintained a good bank balance, his car loan application got rejected simply because he had defaulted on his credit card payments with ABC bank.
In contrast, if your credit score is been high, you may avail several benefits from your banker on account of your good credit behaviour.
Rule Of Thumb
To permanently erase credit card debt, these are some good rules of thumb:
1. ALWAYS pay off your balance every month and on time, otherwise you pay both the interest and late payment fees.
2. Use credit cards as a convenient means of payment and not as a borrowing facility.
3. Do not spend what you do not have.
4. If you do have credit card debt, then take out a personal credit loan and pay it off. The cost of the personal credit loan is lower than the credit card debt. (But, it is better to check with your bank for the facilities, benefits and charges on both.)
5. Pay off your high-interest personal credit loan as soon as you can.
6. Avoid the trap of minimum credit payment. Your bills as well as your interest will pile up.
7. Remember debit and credit cards are different; one debits your account, the other increases your borrowings
Plan ahead for the big purchases and invest (even if it is little) instead of opting for loan to fund the complete purchase. At least, you could do a part payment for the same from your investments, and reduce the hassle of big EMIs.
“A man, whose credit card was stolen, decided not to report it because the thief was spending less than his wife did.”
Jokes apart, plastic money is convenient for all of us; we need not carry excess cash on our trips and can buy goods online. Thus, as long as, you can keep your expenses in check and pay off your debt on time, for (almost) everything else… there’s a credit card!