Credit card usage is growing but not the awareness about the rights and obligations of users. How to avoid the pitfalls that lurk in the fine print.
Bhuwan Raja likes to live life to the fullest without cutting any corners. So when the Bangalore-based professional got married in 2000, he went on a shopping binge and ran up a huge bill of Rs 3 lakh. Money was not a problem because he used his credit card to pay for everything. But this honeymoon with consumerism ended abruptly when the credit card bill arrived. Raja could manage to only pay the minimum 5% of the bill. The story was repeated the next month. And the month after that. Net result: By 2003, Raja’s credit card outstanding had ballooned to Rs 5 lakh.In another part of the country, filmmaker Suniti Ghoshal had barely got over jetlag after a tiring flight from London to Delhi when a call from her bank jolted her out of slumber. The bank had been frantic a l l y trying to reach her to check if the erratic payments on her credit card earlier in the day were actually authorised by her. “I had returned the previous day and the card was with me. However, the bank informed me that the card was swiped at four places to run up a bill of Rs 1.5 lakh in the UK, which I had left over 48 hours earlier,” she recalls. These are just two instances of how plastic can be caustic to your financial health and mental peace. While the profusion of credit and debit cards have opened the sluice gates of spending in India, most plastic users are blissfully unaware of the problems that card usage entail and the dangers that lurk in the fine print. “Often it is a wrong perception and misunderstanding that leads cardholders into a debt trap,” says R.L. Prasad, head of credit cards and personal loans at Standard Chartered Bank.
Rolling over credit card bills is a costly convenience. The card company charges you 2-3% a month, or 24-36% a year on the amount rolled over. Things to Know
• When you rollover you get no free credit period
Here’s an interesting fact: If someone rolls over his credit card bill of Rs 5,000 by paying the minimum 5% every month, it will be six years before he can fully repay the amount with all the interest and fees that accumulate on it. That’s because credit card companies charge 2-3% interest a month on the amount carried forward. That works out to 24-36% per annum and is perhaps the most expensive way of borrowing. Even rapacious moneylenders in the unorganised market charge less. “The interest rate on credit cards is so high because these are essentially unsecured loans,” says Puneet Chaddha, head of card and retail assets, HSBC India.While rollover charges are not exactly spelt out in fine print, much of the other features can only be read with the help of a magnifying glass. Delhi-based Nandraj Agarwal is a convenience junkie who regularly books air tickets, buys books and sometimes even pays for his utility bills using his credit card online. But all that tech savvy was of little help when it came to unravelling the charges on his credit card. “For a long time I was unaware of the foreign currency surcharge that was levied on my overseas expenses. I came to know of it only after repeated enquiries,” says Agarwal.
Are you falling into a debt trap?
|If you say yes to even one of these, you are headed for trouble. |
YOU PAY the minimum amount of your credit card bill each month
YOU USE a credit card because it lets you roll over credit
YOU OFTEN borrow to pay your credit card bills
YOU HAVE taken, or plan to take, a cash advance on your credit card
YOU GET repeated calls from credit card collectors for late or no payment
Of course, credit card companies love customers who roll over payments, make cash withdrawals or are blind to the hidden charges being levied on them. That is where the money is. To entice such spenders, companies dole out incentives like hiked credit limits. The small print on such incentives clearly says sucker!
Instead, you must learn to be a proactive and smart card user. Though regulations are now being put in place to protect card users (see User’s Rights, page 46) there are still many issues that remain unclear—most importantly the various costs associated with cards.
Meanwhile, Raja has cleared all his debts and is happily working in the US. “I had used my credit card only because of the convenience it offered. I had no idea the bill would rise by so much,” he says. He still uses his credit card, but is more prudent while using it. And he definitely settles the entire outstanding amount by the due date.
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