Who doesn't like shopping?
'Shopping therapy', though a bit addictive, is said to reduce stress. Let's face it. When we hunt for, let's say, a smart new outfit, we make plans in our head as to where we can wear it, what can we do and..ahem.. whom would we impress. A major buzzkill during this dopamine rush is money shortage.
"No worries," you tell yourself. Out comes the credit card and you continue to confidently conquer escalators of the shopping mall.
Well, credit cards ARE convenient. Let's count our blessings while we can right now:
- Credit cards provide instant liquidity. This can be extremely helpful in life and death situations like last day of Zara sale.
- All Credit Card companies have tie-ups with hundreds of brands, websites such as Amazon, Flipkart and more. This results in some sweet deals and discounts on electronics, clothes, dining and much more. At times, these deals can't be availed with a debit card so you need to have a credit card.
- EMIs installments tend to get reduced if you purchase something with your credit card. Installments are significantly lower than if you buy the same product with a debit card on EMI.
- Credit cards can function as excellent money reserve.
- Credit cards often come tagged with a certain plan that gives you 'spending points' which you can later redeem to lessen prices of the products you purchase
- For those of us who are almost always broke, credit cards can keep you afloat during those last few days when you can do anything to see a message with words 'salary credited' in your inbox.
Yes, life's good. You've done your shopping, got that rush, washed it down with a nice drink and your wallet still feels heavy because you didn't have to spend anything.
Bask in this moment. Take a nice stroll inside your house. Go to your bookshelf, take paper and pen and SIT DOWN!
Serious business begins now.
- Credit cards have insanely high-interest rates. Most banks charge 20 to more than 40 per cent interest annually on money spent using credit cards. Compare this with your savings account, which gives 6 to 8 per cent annual returns. Credit card spends are a major, even life-altering impact on your finances.
- The concept of credit card has been designed with human psychology in mind. If you are buying something and not having to physically hand out money and delay payment, it creates a temporary sense of comfort. You feel secure because your salary remains intact. This increases the urge to spend more and cycle continues.
- The 'minimum amount' that comes printed in your credit card bill is often an attractive option to pay back each month. This is usually five to ten per cent of the total amount we owe. What we forget is that the bank is charging the insane interest mentioned above on the rest of the unpaid amount.
- Heavy charges apply if you skip a monthly payment.
- And most importantly, your CIBIL score gets severely affected as you get buried under credit card debt. This has serious repercussions as financial institutions do not sanction fresh loan to you if your CIBIL score is low.
There are countless examples of individuals getting into massive financial trouble as a result of credit card debt. At its extreme, credit card debt has the potential to completely destroy your finances and there is no free lunch available.
So how to use a credit card in a safe way?
- Be very selective when you feel like using a credit card. Remember, using credit card equals taking a loan. If you are using a credit card, it often indicates that you are living beyond your means.
- Always keep a track of how much you are spending on your credit card.
- Instead of falling for the 'minimum due amount', always try repaying the product price in full in the very next month when your salary gets credited. For example, if you purchase a phone worth Rs 10,000, try to repay the amount in full rather than letting the bank take 5 per cent of the amount from you and charging heavy interest on the rest.
- The spending point schemes may look attractive, but often they are designed in a way that makes you spend more. Even when you redeem the points, it may happen that you get less net benefit. Hence, examine such schemes, do some calculations and be selective while going for these spending points.
Avoid these mistakes while using credit cards:
- Don't automate credit card to pay for your monthly bills like mobile bill, DTH, gas bill etc. It is wise to pay such monthly bills in cash or by debit card.
- Do not use a credit card to repay another debt and then pay a minimum repayment amount of the credit card. This will lead you into a massive financial drain. It will be very hard to get out of this situation.
- Do not make significant purchases like property. This can, in one stroke, destroy your finances with potential impacts that may last a lifetime.
So in essence, be smart, a bit careful and you won't hate yourself when the bill comes home.
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