The latest cellphone at the mall shelf is nowhere close to your budget; and the seller quickly steps in, saying, “sir, you can buy it in interest-free instalments”. You do a quick calculation and say: “Swipe it!”
Most credit card users are impulsive buyers. They first decide to purchase an article and look at their finances only later. Most, therefore, find themselves constantly servicing credit card debts at extremely high rates, and complain they are being fleeced by banks.
With interest rates on credit cards ranging between 24 and 50 per cent annually, it is the most expensive form of borrowing. Other forms of short-term credit — personal loans, consumer durable loans and loans against gold or fixed deposits — are all much cheaper options.
When Business Standard asked financial planners how credit cards could be used at the cheapest possible cost, the unanimous advice was: “Just don’t use it.” But, the answer could lie somewhere in between. The key to using your credit card and yet cut on avoidable costs lies in ‘intelligent usage’. Here are a few tips:
Time your purchases
To enjoy the maximum available credit-free period, make your purchases at the beginning of your billing cycle. Assuming your billing cycle is between July 28 and August 27, and the payment due date September 17, a purchase on August 22 will be foolish, unless you plan to make the entire payment by the due date. On the other hand, if you buy something at the beginning of the cycle, you will enjoy an interest-free credit period of 47 days.
However, at the end of your credit-free period, you should have enough funds to repay the dues fully, as revolving your credit will involve high interest rates. Harsh Roongta, CEO of Apnapaisa.com, warns, though this strategy works, even a day’s delay in payment would mean the entire interest burden.
Right card for a product
Using a particular card on the basis of the nature of your purchase will help optimise your card usage. These days, banks are forging tie-ups with companies and offering co-branded cards. Banks’ tie-ups could range from those with airlines or restaurants to retail chains and oil companies. Since these are co-branded cards, using these earns you points for every transaction. You can set off these points against purchases or to bring down outstanding amount on your card. For instance, if you are a frequent flier, it makes sense to have a credit card co-branded with an airline. The points you earn on purchase of tickets through this card can be redeemed for free tickets.
| MAKE THE MOST OF YOUR CARD Some tips to avoid unnecessary costs | |
| TIP | WARNING |
| Make purchases at the start of your billing cycle | Make full payment at end of credit period as delay can lead to high interest being charged |
| Choose a card on the basis of your regular spends — preferably one where you can redeem reward points for regular purchases | Avoid a card where reward points can be redeemed only for specific articles as you may end up redeeming points for things you don't need |
| Transfer reward points to the card you use the most | This is possible only if your cards are issued by the same bank |
| Take full advantage of cash-back offers | If cash-back is linked to total spends, use your card for routine spends also. Watch out for expiry of cash-back offers |
| Never forgo free offers | Don’t overspend just to take advantage of free offers |
Similarly, if your expense on fuel is on the higher side, go for a card that is co-branded with an oil company. This way you will earn points on purchase of fuel which can be redeemed for more fuel. In some cases, reward points can even be redeemed for gifts like jewellery, kitchen appliances, electronics and so on. So, in such cases, you should know the gift items you are eligible for on the basis of the number of points you have earned. You need to be careful because you might end up buying things you do not immediately require.
Transferring reward points
If you have multiple co-branded cards but only one of those is used frequently, you can accumulate the reward points on the one that you use the most. Assume you have two cards — one co-branded with a hotel and another with a retail chain. If you spend more on shopping than eating out, it would be a good idea to transfer the reward points earned on the hotel-co-branded card to the one co-branded with retail chain. But, there is a rider. Points can be transferred only if both the cards are issued by the same bank.
Casing in on cash-back offers
Many cards offer cash-back offers, which could be useful. A certain amount, usually a percentage of your bill, is offered as cash-back. In some cases, the cash-back may be linked to spends on your card. In such cases, it will help to use your card even for routine spends like making payments of utility bills, restaurant bills etc.
But, there are certain things to watch out for. Sometimes, these cash-back offers run for only a certain period and may not be available throughout the year. In some cases, there could even be a cap — say, of Rs 1,000 or Rs 2,000 a month — on the cash-back. These things need to be kept in mind.
Cash withdrawals/cash advances
Withdrawing cash using credit cards should be done only in case of an emergency, as you will have to pay a transaction fee for this. Withdrawing cash using a debit card, in contrast, is free; but you can do so only if you have sufficient money in your account. The transaction fee for cash withdrawal using credit cards is 2.5 per cent at most banks, or three per cent at some. However, there is a clause on minimum amount, too. For instance, ICICI Bank charges 2.5 per cent on cash advances, subject to a minimum of Rs 300.
This means, even if you withdraw only Rs 1,000 (in which case the fee should be Rs 25 at the rate of 2.5 per cent), you will be charged Rs 300 as a transaction fee. Effectively, you pay transaction fee at 30 per cent, instead of 2.5 per cent. So, it makes sense to withdraw a higher amount — the transaction fee on the withdrawal of Rs 12,000, at 2.5 per cent, would work out to Rs 300.
Also, repay the amount positively on or before the due date because you will have to pay the interest as well if you don’t pay the money within your credit period. Certified financial planner Ranjeet Mudholkar explains: “If you look at your credit card as just a mode of payment — and not as credit — things will be fine, as you will always pressure yourself to pay it as quickly as possible.” And, that’s the way it should be.
