Festival spending: Maximise rewards with right cards, stick to planned buys

According to the Axis Securities Credit Cards and Digital Payments Business Monitor report, there has been a marked shift towards credit card usage compared to debit cards. In August 2024, credit card spends were 3.9 times higher than debit card spends, up from 2.8 times in August 2023.

While credit cards have become the preferred payment option for many, this has also raised concerns about overleveraged, particularly during the festive season. Banks are partnering with major e-commerce platforms and offering discounts and equated monthly instalment (EMI) options on credit card purchases to entice customers. E-commerce platforms are offering irresistible deals. This may encourage overspending.

 

It seems like a win-win for everyone. “Buyers get deals at lower costs. E-commerce companies get to boost their sales, and credit card companies benefit as customers revolve their credit at high interest,” says Abhishek Kumar, Securities and Exchange Board of India (Sebi)-registered investment advisor and founder, SahajMoney.com.

Experts caution against overleveraging. “Credit card debt comes with high interest cost and stringent penalties. If you do not repay on time, the costs balloon,” says Adhil Shetty, chief executive officer (CEO), BankBazaar. Individuals can quickly slip into a debt trap.

Avoid withdrawal from ATMs

Credit card withdrawals from ATMs incur significant fees. “A transaction charge, which is a percentage of the withdrawn amount, applies immediately,” warns Shetty.

“Never do this as interest is charged per day,” adds Mohit Gang, co-founder and CEO, Moneyfront. Interest rates on such withdrawals can range from 24 to 46 per cent annually.

Compounding interest trap

Credit card bills usually offer two payment options: the total amount due and the minimum payable; the latter is around 5 per cent of the total. While paying the minimum might seem convenient, it can quickly lead to a debt pile-up.

“The unpaid balance attracts a monthly interest of 2-4 per cent,” says Shetty.

A late payment leads to a penalty, which according to Gang, can go up to 30 per cent. Add the 18 per cent GST on both interest and penalties and the burden becomes heavy.

To avoid these pitfalls, experts advise paying off the full balance within the interest-free period. Gang notes that failing to pay even the minimum amount results in a default, which harms your credit score.

Avoid festive overspending

The festive season often encourages impulsive purchases, especially after receiving a Diwali bonus. “Allocate part of it to savings or investments, rather than spending it all,” says Gang.

Kumar suggests preparing a list of necessary purchases and sticking to it, while Gang advises comparing prices across platforms to ensure the best deals.

Credit cards come with various benefits and rewards (see box). “Big-ticket electronic product manufacturers have tie-ups with card companies. Check which card offers the best discounts and cashbacks,” says Shetty.

Managing credit card debt

Kumar recommends that credit card EMIs should not exceed 30 per cent of your post-tax income.

To reduce existing debt, he advises using liquid savings to clear high-interest credit card balances. If that is not feasible, cut discretionary spending. Alternatively, consider paying off credit card dues with a personal loan or an overdraft facility, both of which usually carry a lower interest rate.

Major credit card-e-commerce tieups 
 

Flipkart’s The Big Billion Days: 10% off using HDFC debit cards, credit cards and EMI transactions
 

Flipkart Axis Bank Credit Card: 5% unlimited cashback; customers can avail instant credit and no-cost EMIs with Flipkart Pay Later

 

Amazon Festive Sale: 10% instant discount with SBI debit and credit cards
 

Myntra Big Fashion Festival: 7.5% discount + 5% off using Kotak credit cards

 

Source: Moneyfront