Moneymanagement’s Weblog

Managing your credit card debt

Posted in credit cards by moneymanagement on December 15, 2007

Though widely used and immensely convenient, credit card can become your worse enemies if you are careless. One negative aspect of using credit cards instead of cash is that you don’t feel like you’re spending real money. The pleasant feelings you experience when you purchase the item are disconnected from the unpleasant or painful feelings of making the payment when you get the credit card statement.

Studies show that most people are much less likely to buy, or less willing to spend as much, when paying with cash as opposed to credit cards.

Falling in a debt trap

Falling in a debt trap is easy when you using your credit card. The problems start not when you use your credit card but when you do not pay the entire amount on the due date.

The bank will charge you an interest of 2.95% (atleast) on the pending amount.

And, this interest is charged on a monthly basis; per year, it works out to a whopping 35.4%.

If you have spent Rs.1,00,000 this month then the interest you pay works out to Rs.2,950/- if you have not repaid the entire amount that month.

Lets say you realise the folly of your ways and spend only Rs.10,000 the next month on the credit card.

Unfortunately, you are no longer enjoying the benefit of ‘free credit’.

This month your outstanding balance will be Rs.112950 + Rs.3332/- = Rs.116282/-

Earlier, you spent money through your credit card and paid up when the bill came at the end of the month.

From the time you spent the money till the time you paid the bill, you were enjoying free credit; when the bill came, you paid just what you spent.

Now that you owe the bank money, you don’t have the privilege of free credit anymore.

Also any the very convenient cash withdrawals are never interest free.

Now, until you clear your loan, every single payment you make using your card will be added to your loan amount and you will be charged interest on it.

This will go on till every single rupee has been repaid.

How to avoid Credit Card Debt

· Your credit card spending is a loan and make sure that you treat it like wise. Credit card companies agree to loan you money interest free for averagely 35-40 days. You can use this to your advantage as long as you pay off the “loan” by the due date each month.

· If you feel you need to carry plastic for emergencies, then try a debit card. It will ensure that you are spending only the money you actually have. Unlike the west, in India we have a vast support system that ensures that you can easily borrow emergency cash when you need it.

· If you do use credit card do try to make the payments in full. Incase you are unable to meet the entire payment then ensure that you set aside the entire money for it from your next paycheck and curtail the credit card usage till the balance is cleared. Remember that there is whopping 36% p.a. or more interest to be paid not only on the outstanding balance but also on any fresh purchases you make.

· Plan your purchases well. When you go out shopping make a list and stick to it as far as possible. Don’t be swept away by discounts on products you don’t need. Remember, retail stores are designed so that you spend more. Beware of marketing tactic that make you spend more.

· Avoid cash withdrawals and balance transfers from your credit card since they attract interest from day one.

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One Response

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  1. umesh said, on July 1, 2008 at 3:31 am

    Hi
    I think the title should read Credit cards (not mutual funds)

    I saw your link from Creativegarh and liked your page content and design very good.

    Do try writing on art as an investment too sometime?

    Cheers!

    Umesh


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