• THE OUTSIDE VIEW
  • JUNE 23, 2017

How To Use Your Credit Card Thoughtfully Post-Demonetisation

In the Financial Year (FY) 2016-17, Indian banks recorded a flat growth in credit of 4.5%. However, they managed to woo their retail customers to take on additional credit cards. In the last fiscal, credit card issuance grew by massive 57%, while debit cards recorded a growth of 36.95%, as reported by Daily News & Analysis dated June 02, 2017. The banking system issued 53.37 lakh credit cards in FY 2016-17.

Attractive reward-point schemes and customer-centric marketing strategies are believed to have helped banks accelerate growth in the credit card segments. As revealed by bankers, the card spends have also gone up post demonetisation since individuals preferred electronic payment options.

Nonetheless, banks have managed to issue 12.31 crore debit cards outnumbering credit cards by a fair margin. This suggests that a huge jump in the credit card segment springs from a relatively smaller base, and the usage of credit card is still restricted to spendthrifts. However, the increased spending through credit cards calls for some attention.

Therefore, if you are planning to apply for a credit card or are using one already, please read further...

While using credit cards moderately is the way to go, following a disciplined approach can save you from falling into a "credit-card debt trap".

Tips To Use Your Credit Card Prudently...

Know the limit on the card:

All credit cards come with a ceiling limit. Choose a card with a low limit and moderately utilise the credit limit, say 30%-40% of your overall limit.

Pay up before the end of the credit settlement cycle:

One of the benefits credit card companies provide is a free credit period, which means, if you make payments before the payment cycle ends, interest won't be charged. However, if you fail to honour payments within the due time, you are likely to pay interest which is usually as high as 36% p.a., i.e. 3% on the outstanding amount due each month.

Avoid availing the grace period:

Some creditors may offer a grace period to settle your dues. Ideally, you shouldn't wait this long to settle your credit card account, and it is best to pay within the free credit period. This may dampen your credit score, and in turn, weaken your eligibility for loan proposals in the future.

Don't get swayed by reward points and other benefits:

Credit card providers will always want you to maximise the use of credit facility because that's a way they earn more revenue. And in case you don't make a payment in time, the interest you are charged turns out to be a bonanza. So, one marketing strategy is to launch attractive reward-point systems that encourage you to spend more on a credit card. Control impulsive purchases and keep the usage of plastic money under strict control.

Secure your card details:

While using your credit card to make online purchases, for security reasons do not store your card details online as they can be misused if the merchant site fails to protect the secrecy of your data. Always use two-step authentication and don't allow any 'fast-forward' transaction.

Unless you see "https://" on the payment page, don't enter any payment/personal/card details. By viewing the site information, you can also check if the communication between you and the website is private and protected. Be careful when using your card at a merchant outlet as well.

Avoid withdrawing using the credit card:

Please note this unwritten rule in your diary. If you use your credit card, even in an emergency, to withdraw money from an ATM, credit card companies charge an exorbitant fee. If you maintain a contingency reserve, there will be no need to use your credit card to borrow cash.

Key points to remember while opting for a credit card
  • As far as possible use a debit card instead of a credit card-the first step to rationalise your expenditure pattern.
  • Revisit your lifestyle options if settling your credit card account is taking a big toll on your monthly income. This is a sign that you are overspending.
  • Never use another credit card to settle your old credit card dues-this is the beginning of a big debt trap that may haunt you a long time.
  • If you are unable to keep your expenses under control, perhaps it is time to speak about prudent financial planning with a reliable financial planner in your vicinity.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

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