Shash V. moved out of his family home in Chennai to take up a job in Delhi. Footloose and fancyfree, the bank executive did not want to make any compromises when it came to spending. The only thing standing between him and the good life was his low monthly salary. Rs 30,000 was just about enough to take care of the rent of his South Delhi flat and living expenses; even a TV and AC were out of reach. That’s when he discovered the EMI facility on his credit card and immediately bought a 29-inch TV on monthly instalments of Rs 1,200-1,500. He then started acquiring more cards—and loans—till he had 12 credit cards, on which he revolved nearly Rs 1.5 lakh by paying only about Rs 1,000 a month for nearly eight months. Last year, he realised that he did not have enough to repay the outstanding amount on a single card. His solution? He took a personal loan to clear the dues and cancelled six cards. Today, his total outstanding is close to Rs 2 lakh, but he is planning to repay it all in October and then limit himself to four cards.
Financial planners might throw up their hands in despair, but Shash insists that he knows what he’s doing. “I can confidently roll over credit for three months because I know that my monetary incentives, which come at regular intervals, can cover the entire amount. Plus, I have a good credit history because I always pay twice the minimum amount that is due,” he claims. This might work for Shash, but it’s not going to work for most salaried people who don’t get regular incentives.
Many customers simply pay the minimum amount due, not realising that they are going to be hit by a shocking sum as interest on the unpaid balance. And when they get this bill, many of them use either another card to pay, or take a personal loan. Both options are ruinous as the interest rates are exorbitant. But these are also the customers who will be offered free gold or platinum cards; anything to encourage them to spend even more.
When asked how a person can pay the steep bills relatively painlessly, Sachin Khandelwal, head of cards group, ICICI Bank, says, “Convert the due amounts into instalments. Based on your monthly capacity, you can work out, say, six or nine EMIs. This is much easier on the pocket as the EMI options are at approximately 1.7% monthly rate against the regular revolving credit of 3.2-3.4%.” As an emergency measure, banking experts also suggest a personal loan, say to clear out an exhausted card. Adds R.L. Prasad, head of cards, Standard Chartered Bank: “A personal loan on your card may be more convenient in terms of paperwork, but it need not have the best interest rates.” No matter who you approach for the loan, interest rates will range from 18% to 24%. So this should strictly be the last resort.
Shash V., 26
He had 12 credit cards, on which he had revolved about Rs 1.5 lakh. When he realised his finances could not cover even one card, he cut down to six cards.
• Stop using all cards till you pay off outstanding bills and start cancelling extra cards.
• Stagger the billing dates on the cards to avoid being hit by a huge amount every month.
• Opt for an EMI scheme rather than a personal loan, which should be the last resort.
THE PRICE OF ROLL-OVER CREDITRolling over credit now will cost you nearly 30% more than it did in mid-2007
Amount due on August 1*: Rs 10,000
Part payment on August 9: Rs 4,000
Fresh purchase on August 14: Rs 2,000
|Date||Amount||Interest at 35% P.A.||Interest at 50% P.A.|
|1-9 Aug ||Rs 10,000||Rs 76.64||Rs 109.58|
|9-14 Aug||Rs 6,000||Rs 28.74||Rs 41.09|
|15-31 Aug||Rs 8,000||Rs 137.95||Rs 197.25|
|Total interest|| ||Rs 243.33||Rs 347.92|
|*This is the start of a billing cycle, not the payment due date|
THE PRICE OF IGNORANCE
|K.V.S. Manian, Group Head, Retail Liabilities, Kotak Mahindra Bank|
Having been a banker for far too long, I don’t think I have committed any major mistake with plastic money. An instance that comes to mind has more to do with ignorance—not understanding how credit card companies work out the price of using a card abroad. The biggest mistake that credit card-holders make is not understanding that a credit card due has to be repaid, that it is an interest-free loan for a fixed period beyond which one has to pay a fee!
On the banking front, there are a few instances where I have been in minor troubles. To begin with, there is the quarterly minimum balance that banks ask you to maintain. It’s not easy for people to understand the way this is calculated. I was no exception and was surprised when I was charged penalties for non-maintenance of the minimum balance.
There are some other mistakes that I have seen people commit— many don’t realise that there is a TDS on bank deposit interest or that there are income-tax forms that one has to fill to avail of tax benefits. With the tax laws governing the interest earned on fixed deposits changing so often, even I have occasionally felt confused enough to seek expert help.
Then there is the issue of nominating a beneficiary. In recent times, I have come across many who have been troubled by this issue in their later years. Likewise, credit card roll-overs are expensive and people tend to forget the consequences of such small mistakes that have a compounding impact on their finances.
But several of these mistakes have a common origin—not reading the fine print and being financially illiterate.