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Be wary about credit cards.


Credit cards.

Technically speaking, a credit card is an unsecured loan that carries a very high rate of interest.  It is issued based on your income. The concept behind it is very simple – you can purchase goods or dine in a restaurant without making immediate payment. The bank would make the payment for you and will allow a credit period of 30 or 40 days to clear it back to the bank. As long as you utilize this credit facility very cleverly, there’s no problem. In fact, it’s like getting a temporary loan without any interest. If you can pay the amount due on it within the credit period mentioned, it’s free money.  But that’s where the benefit ends.

What are the traps?

The first trap is that it will tempt you to shop more. Most of the credit card bills will also contain a list of offers that’s too tempting. For example my latest credit card statement has a shopping broacher attached to it in which I am offered an interest fee facility to buy a smart phone at a particular rate mentioned in the broacher.  I can pay back in six equal installments. It’s natural for youngster’s to get tempted on such offers.

The second trap is that the credit card statement will exhibit an amount called ‘minimum due’ which if paid at the right time, will keep you out from the list of credit card defaulters. Hence, after overspending, just in case you could not pay back the amount, you can still survive by paying just the minimum due which would be around 5% of the amount outstanding! For example if your dues are 35,000 your minimum due would be around 1,750 only. You may get an impression that this amount consists of interest and some portion of principal but, actually, this amount would consist of interest and other charges only.  That’s effectively 60% interest per annum. That’s why it’s such a killer.

Trap three– it gives you the facility to withdraw cash from any ATM counter. The moment you do that, you’re billed 1.5% or 2% of the amount withdrawn as ‘processing fee’ and the interest is charged on the amount withdrawn plus the processing fee. For example if you withdraw 10,000 you will have to pay back 10,150 with interest on it till repayment. There is no interest free credit period for cash withdrawals. It’s only for purchases.

Trap four– You will be tempted to do a lot of online shopping. There are hundreds and thousands of online shopping websites now. Online purchases require your credit card number to be disclosed. If such datas are not transmitted through a secured system, it may reach fraudsters who will miss-utilize your credit facilities. Finally you’ll end up responsible for the dues they make. Online purchases can be made only through trusted websites which has visa approval.

Trap five – If you have overdues on credit cards, that is, if you fail to make at least the minimum due on the card, that going to cost you even higher. Once a credit default is made, you will be slapped a fine of 250 or 500 plus a higher rate of interest. From there on your liability will skyrocket if not cleared immediately.

Trap six – insurance that comes ‘free’ with credit cards- An insurance scheme will also accompany most of the credit card offers. Telephonic marketers are employed by the banks to trap in customers with credit cards to subscribe to insurance schemes that would take monthly premiums from your credit limit allowed. The deal would look like a simple procedure, but that’s not what credit cards are meant for. Credit cards should be used strictly for your personal shopping purposes, within limits thereby utilizing the free credit limit that’s given to you.

Credit cards are like boomerangs. If you know to handle it, it will give you results. If used recklessly, it might just come back and hit your face.

The thumb rules are simple –

  • First know when the credit cycle starts. (Say 1st of every month)
  • Then know your credit period (say 30 or 50 days).
  • Utilize those thirty days interest free. That is, do all the shopping in the first week itself. If you purchase something on 25th, all you have is 5 more days left to clear off your debts without interest.
  • Always keep track of your credit limit and make sure you never cross that limit. Once you cross the limit, you free credit period ends there and the money becomes payable immediately.

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