I can’t help writing about credit card pitfalls and how to avoid them – my latest client’s financial planning has gone horribly wrong as he lives on his 4 credit cards.
He is flamboyant, he is shopaholic and has no clue on how to read a credit card statement. He thought he knew all the tips on using a credit card but stands corrected.
I thought I might share a few points with readers to ensure you understand little known secrets that can lead to credit cards pitfalls.
Credit Card Pitfalls – Rolling over is a costly game
This probably is the most easiest and best solution for anyone who has run up a big credit card bill. Rolling over your credit card bill ensures you can pay it tomorrow – the only issue is tomorrow never comes.
Credit card companies charge anywhere between 2 -3 % per month on roll overs, this translates to 24 – 36 % per annum. Why on earth would someone want such a costly liability ? I guess only if he is not aware of credit card debts.
One hidden secret is that when you roll over, you get no free credit period.
How to avoid this credit card pitfall ? It is wiser to break up this liability into personal loans which come at say 15% interest rate per year. Better still, borrow money from your family, pay these dues off and over a period of time, return this liability to your family at 0% rate of interest.
Balance Transfer means you still go to pay the balance !
Many people possess many credit cards and keep transferring the balance from one to the other. One chap I knew carried the dates when he needed to do the transfers in his wallet and did it with meticulous precision each month. He got paid well each month from his salary, but he choose to trade that money on the stock market rather than pay his credit card dues !
How does one avoid such common credit card pitfalls ?
While transferring a balance is fine occasionally, it cannot be a habit. The money you owe still needs to be paid ! You are just moving the deadline farther ahead in the future.
Credit card companies will lure you for a balance transfer with the assumption that after you move to them, you might not be able to pay their credit in time and they can earn out of you.
You need to note that some companies still charge Rs 500 for balance transfer while others have it for free. Other luring things are less interest rate for some months initially or interest free months to enjoy after the balance transfer.
How to avoid this credit card blunder ? I guess to begin with, understand how many credit cards one should have. Second, simply avoid balance transfer, instead pay up using the method suggested above by borrowing at cheaper rates. Should you have to roll over, have a plan in place by which you can clear off the loan.
The cash-back offer
These days many credit card companies are offering a cash back offer. Just don’t run up a huge bill assuming that you will get a small percentage of it in cash-back. There is no free lunch in this world and the last you expect someone to feed you for free is the credit card companies.
A little known secret – there is no cash-back given out if the payment is late !
And then there are umpteen caveats like the credit card has to be swiped on the issuer’s machine for the cash-back to be valid. Sometimes, if the minimum monthly spend is not met, there is no cash-back !
How to avoid ? Control your emotional greed when you hear the word cash-back. There is no sense in committing such a mistake of wanting a couple of hundred rupees back from them and running up a huge bill in the process to make that happen.
No, the credit card is not an ATM card
So many of us use credit cards at ATMs to withdraw money for petty spends. I consider these one of the worst credit card pitfall.
Your bill is going to get bloated by the interest that you need to pay on the amount withdrawn. The interest can range from 2 – 3% a month from the day you withdraw till you pay. You also lose the free credit when you do a cash withdrawal.
Credit card companies also levy a charge on the amount so withdrawn, though this differs from card to card.
Card holders need to stop the urge of using the card like an ATM card – it is not a replacement for a debit card.
My reading is that most if the above credit card mistakes can be simply avoided by not having a credit card. Though that is an extreme measure one can take, controlling the urge of wanting things for free (cash-back), putting aside the responsibility to pay a loan in the future (balance transfer and rolling over credit) and using your credit card wisely can still leave a good experience with credit cards.
@Radhey,
Thanks for bringing up these points, very useful.
I have been using credit cards for over 7 years and i always pay my dues before the due date.
Nice informative article for people who don’t understand the liabilities of credit cards.
If used wisely credit cards are very beneficial. I am a huge fan of credit cards and use it for 80% of my expenses. Below is how I avoid pitfalls and utilise my credit card to the most: –
– I ensure that I keep only one credit card and I don’t fall prey to marketing gimmicks and end up buying multiple credit cards. The benefits are just not worth the time and effort to manage multiple credit cards.
– I have set standing instruction to pay minimum credit card dues to avoid any major penalties in case I fail/forget to pay the bill on time.
– As soon as I get my credit card bill, I put a reminder 2 days before due date in my calendar to make the payment. So far I have never missed the due date.
– I use my credit card to pay all my bills online. This is not just convenient but also helps me in earning reward points.
– I use my credit card to shop online. Again this is not just convenient but also helps me in availing big discounts. There are plenty of websites offering big discounts if you chose to shop online. Some even give option of 0% EMIs for specific bank credit cards.
– I don’t carry cash when I go for shopping. I always prefer to use credit card, it is hassle free. But this is where you have to control your greed.
My advice is to keep one credit card, use it wisely, use it for all your expenses and earn reward points, enjoy those reward points and don’t get too greedy. It is good enough that credit card companies are letting you pay after one month without any extra charge.
@Vivek,
Great stuff, thanks for sharing your personal information.
@Vivek K, First of all thanks for such a detailed response.
I sue them like you but my experience has been that I can often control my expenses had they not been there. In my mind, when you go shopping, cash is better than cards as you are limited in your spends.
It is good to try and control greed and lotsa shopping, but the truth my friend is that it just does not happen !
So going back to your list I will implement the standing instruction to pay minimum credit card dues because I don’t have that in place.
But I will have to see how I can control my expenses on credit cards.
@Radhey Sharma, Definitely try it Radhey. The day you walk around with just a credit card in your pocket and no greed would be one of the best days, it has its own charm. 🙂
I am lucky to achieve it and hence a big fan of credit card. The only worry I have is credit card being stolen. To avoid any big damage I have kept the limit to minimum possible.
@Vivek K, Great going.
Wish all the other credit card users were as calculative as you so they didn’t have to feel the burden of the undue credit card debts.
In current scenario Debit card facility is must for all but you have to make choice to take credit card or not, Credit card use wisely within limit is boon, but over use lead to several financial implications.
http://strategic-growth.in/finance/index.php/credit-or-debit-card-its-your-choice/
@Panna Kapadia, Is this your website ?
There has been a lot of problems with credit cards and not to forget the credit card companies in past. They used to send nonsense bills which the customer has no idea about. Many of customers have stopped using credit cards after this and are happy with the new atm cum Debit cards.
Thanks for sharing!!
@Financial Planner Certification, I am sure majority of those nonsense bills belong to ICICI, I have heard so many cases.
@Vivek K,
Yes I have heard most of these cases happened with ICICI, but I faced this issue with IDBI. Anyways I think Bank’s Credit Card work is going much better and smoother than earlier.
Credit card if used wisely is great, moreover some credit cards offer you 45 to 60 days limit too. My credit card bill is generated on the 5th of every month, so i try to do my shopping only after 6th so i get more days to enjoy credit. It works like a charm when i book travel tickets.
@Rakesh, Yeah Rakesh you are right. These small things can make personal finance so simple and the tools so useful, that it’s quite a shame not all of us use it to its maximum potential.
Even I need to learn a few things !
By the way I forgot to mention that I really like the picture you have put up for this article. It reminds me of my friend who had 5 credit cards. He and his roommates spent lavishly for months and later came under huge debt. Finally my friend somehow paid all the money and cancelled all his credit cards. I can now imagine him being carried on a credit card stretcher just like in the picture. 😀
One can only imagine how many such victims have made these credit card companies rich?
@Vivek K, Since the number of credit card users is increasing in India year on year, I guess the profit of these credit card companies must also be going up as many would use these “stupid offers”.
There are many other photos in Google images. 🙂
@Vivek,
Very true. I had a colleague who used to borrow from one credit card to pay the dues of the other one. He had over 5 cards and kept doing it regularly. I don’t know how he managed to repay everything.
@Rakesh, LOl, I also knew of a chap who did this.
In fact, when he used to get calls from the credit card companies, he used t invite the call center ladies for a coffee as well, which obviously they used to decline.
Funny guy. I think he must have paid his dues with his US earnings.
Good article Radhey.
Yes, if credit cards are used wisely they are great but VERY less do that & hence a big hassle afterwards.
For emergencies credit cards are a boon but for regular/every day life isn’t a debit card sufficient?
One of my very good friend had a credit card which he had taken after his first job; he used it SO much (you can understand the anxiety of the first job & the spending it follows) for few months (6-10) that it took him 2-3 years to clear the entire debt of the credit card.
Is there any difference in life/every day spendings if one doesn’t have a credit card? I don’t have one.
@Sudip D, There is not much difference in life Sudip. It’s just the ease of use and not to carry big amount money when you go for monthly grocery shopping or any other bulk shopping. Also, you get the advantage of paying the debt after a month. If you think you might end up spending more with CC as compared to paying cash then stay away from them. To avoid carrying cash debit card is a better alternate.
@Vivek K, Yes, you are right.
But somehow I don’t like the concept of buying things on debt (at least small/every day necessities) at lease TILL NOW.
But that’s a personal choice, so it depends/vary from person to person.
@Sudip D, You are right about that Supid, it is a personal choice.
@Sudip D,
I don’t think credit cards shoudl be used in emergencies, one needs to plan for emergency fund for that. If you end up using credit cards, it means one did not plan for it.
As Vivek says, if used wisely, it’s a great thing to have,
@Radhey Sharma, Well by emergency I meant IMMEDIATE emergency like (suppose) you/your closed one met with an accident (God forbid) & for admission in the hospital/other basic formalities there’s not sufficient fund in the savings account so in that case credit cards can be used.
Same with the case like booking air tickets, suppose you/your family missed your flight so to book another ticket for the same/next day the prices will be at the peak, in that case if there’s not sufficient fund in the savings account credit cards can be used.
@Sudip D, These days banks allow you to link your savings account to sweep-in FD accounts and the money can be automatically withdrawn [in multiple of 1000s or something] if savings account does not have sufficient balance. That is how you need to plan for emergency funds.
I see your point in using the CC under unusual circumstances but there are better alternates you can plan for. In case you use CC in emergencies and forgot to pay the dues, you will end up paying huge interest unnecessarily.
@Vivek K, Exactly, that is the point. Things can be achieved in multiples way but some of them will not be suitable at all.
Best go with the suggestions the experts like Vivek and Rakesh are giving here 🙂
@Sudip D, It can of course be a fall back option but better keep that money in savings account.
We recommend 50% of emergency money to be in savings account.
@Radhey,
Agree with 50% to be kept as emergency in Savings.
Expert like Vivek? Gee thanks Radhey but I am far away from even coming close to an expert 🙂
@Radhey,
I am still a novice, started doing my financial planning only after reading blogs like yours. But i must agree about Vivek, i have seen his comments and he has a very good knowledge.
@Rakesh, Thanks Rakesh, I just write from my experience.
But I am sure you are more than a novice 🙂
@Vivek K, You guys are all good, let me tell you and that is why it is fun talking to you folks. Anil has gone into hiding ?
@Radhey,
Yes, did not see Anilji’s post for last few days, must be busy with personal work.
@ Radhey,
An excellent post. I have seen so many times people defaulting on their credit cards – either they don’t have the funds to pay or just by sheer carelessness. And the after maths are really costly – ranging from just paying interest to ruining of credit history and possibility of taking future loans.
Regards
BFA
@Banyan Financial Advisors, Have you ever defaulted on a CC payment? Anything you would like to recommend the readers to avoid these pitfalls?
@Vivek K,
@ Vivek
I have been financially very careful with my credit cards and all form of loan transactions. Infact I got so much urged after reading your comment that I have written a complete article on the after maths of defaulting on the credit card payments. My experiences have been mentioned in this article http://insight.banyanfa.com/?p=421
Luckly I have got a good exposure of financial services in Western Countries and I can tell you for sure that credit card defaults really burns a person’s credit history and your chances to take future credit facility from any banking / financial institution.
Let me know what you think after reading my article.
Regards
BFA
@Banyan Financial Advisors, It’s good article BFA, glad my comment inspired you to write an article :).
I have left my comment there.
@BFA,
Just happened to read this article, excellent analysis.
You are doing a great job.
@Rakesh,
Thanks Rakesh. I also admire your financial blog. Infact I come every other day and I find a new article on your blog 🙂
Regards
BFA
@BFA,
I think you meant Radhey. I am just a reader trying to get my finances in order.
@Rakesh/@BFA
I think Radhey has got someone to look after his blog. 😉
Even I am impressed with the no. of posts Radhey does every month.
@Vivek,
Yes, agree with you. I think Radhey has a good team. Not only does he comes up with a new article every other day, he also makes sure to reply to each readers comment which is great.
We hardly find people doing it.
@Rakesh,
Manish from jagoinvestor does that too, I like his blog as well.
@Vivek,
Yes, you are right. Manish is doing a great job too. I have been following him for the last couple of years.
@Rakesh
Yes and the good part is he replies to each and every single comment, pretty impressive.
@Vivek excellent advice on how to control greed and carry a credit card. With Amex though, i see that most of the stores dont accept it. Which credit card issuer do you use and do you really see a benefit of the credit card points as in redeeming them.
@Minku,
You are right, you don’t have much choice with Amex. My employer provided me one but i have not used it till date. I am happy with HDFC.
@Minku,
There are benefits of redeeming credit card points. Apart from the 45-60 days credit limit the points that you collect, you can redeem online to buy gifts or gift vouchers. Last month my cousin wanted to pay fees for a course costing 50k, I paid it via credit card and got a bag full of points.
I will use them to buy gift vouchers.
The best thing i like is the credit limit. I usually start making my purchases after my current bill is generated.
@Rakesh,
Yea reward point is a great feature. And the best part is you can accumulate them for as long as you want, they never get expired unlike debit card reward points.
@Vivek,
Yes and also you can use them to buy gifts for your spouse & kids.
@Rakesh,
Why kids and spouse man? Why not for myself? I have used credit card on them so I deserve the reward points at least 🙂
@Vivek,
Yes very rightly said. Manhattan used to have a unique feature wherein for every 100 points collected you could adjust Rs.50 against your card.
@Rakesh,
Nice one but it is not widely accepted in India, so won’t be of much use.
@Vivek,
Though i have not used it in stores, I have used it to make online purchases both local and overseas and never had any problems.
@Minku, Glad you liked it Minku. I have been using Citi for a long time.
If a card is not accepted widely then I don’t see any use for it.
@Vivek,
Good to hear that you are using Citi for a long time, many people complain about it.
@Rakesh
Best banking experience ever with Citi. Their customer care is relatively better and products are good as well. I find them a bit expensive, that’s all.
@Vivek,
Wow, that’s one happy customer, My sister used to always complain about charges wrongly debited to her credit card.
@Rakesh,
She should escalate the matter. The escalation matrix is on the website and it is very effective. I am telling from personal experience.
@Vivek,
She did that and it was OK for few months and then again they started doing the same thing, so she cancelled the card.
@Rakesh
I escalated the matter to their business heads and I got a call from a senior executive. She heard my recorded conversation with their customer service officer and accepted that they did not handled my complaint well. She then personally rectified my issue and gave me a few thousand reward points as a goodwill gesture.
These days many good companies are giving freebies to keep their customers if they decide to leave due to any issue from their end. And I am thoroughly enjoying it 😀
I have a Citibank card as well which i will use going forward. As for the points, i haven’t used them yet. Will share my experience soon.
@Minku, In case you have platinum card from Citibank, you might be getting an opportunity to earn bigger reward points. I heard that they are replacing their platinum credit card for existing customers with another card, which will give double the reward points of what you are getting now.
Check with them and watch the space!