Personal Finance: The other side of credit cards

PERSONAL FINANCE: FUTURES
The Other Side Of Credit Cards

How can something made from plastic be good for your financial health? An anxious father offers his son tips on using and abusing a credit card intelligently. His parting shot: don't be trigger-happy.

By Dilip Maitra

Dear son,

Happy birthday. Now that you have turned 18, your mother and I thought it was time we gave you a credit card. Actually, it was your mother's idea, and in the interests of domestic harmony, I went along. It isn't an independent card. It's an add-on on my existing card, although your mother thought it would be a good idea to apply for the new ANZ Grindlays Star World co-branded card, and give you an add-on on that. I wasn't tempted by the 70-hours of free Net access the card offered; your mother, though, was taken in with the chance the card offered its subscribers, to star in a Star World television series. In an indiscreet moment, she confided that she planned to send them a demo tape of you doing that sickening Jim Carrey imitation of yours, and I promptly trashed the application form. And, some day, sure, you'll thank me for this.

I have also flirted briefly with the idea of getting you one of Citibank's just-launched e-cards. It isn't really a card, just a password and a number, but the low credit limit these cards came with made them attractive in my eyes. Your mother wouldn't have any of that though: she painted a rather graphic picture of you using up your entire credit limit at Kara's adult playground (wonder how she knows about these sites). So, here goes-a plain vanilla old-fashioned plastic credit card. I read somewhere that there were close to four million cards in the country-one more won't make a difference. I also remember reading that people spent close to Rs 4,800 crore last year. Don't try to up that amount too much.

There's no arguing with it, son: a card is extremely useful. Carrying cash is risky. It is also unwieldy. A card also makes you eligible for small benefits: discounts at a few outlets; special offers; and free gifts. With a card, you can also withdraw cash from ATMS located across the country. A typical card comes with a credit period of 45-50 days, and armed with a global card, you can spend in any currency and pay back in your own.

Before I start sounding like a free-mailer for a credit card, let me stop and move on to the real purpose of this missive. It is to acquaint you with the perils of using a credit card. As an add-on member, you'll not encounter many. After all, the charges you tot up will eventually have to be cleared by me. But since you will be getting a credit card of your own soon, read up. I can think of no better coming-of-age gift. As to whether, it can be used to impress the girlfriend, I am in the dark. A few years ago, it could have been. Now, I am not so sure.

There's a user manual that comes with this card. I suggest you read the fine print on it carefully. For instance, at the end of each billing cycle you will receive a statement with the statement 'pay as little as five per cent of your outstandings' placed prominently. Do that and they've got you. Since you want to study economics, let me explain why. Credit card companies make their money from customers who roll-over credit. If everyone cleared their entire outstandings at the end of the billing cycle, card companies will go out of business: after all, they are the ones who incur the interest cost for your free credit period.

Here's how a roll-over works: if you do not pay the entire amount, you aren't entitled to a free line of credit any longer. Thus, you pay interest not only on the balance, but also on any fresh purchases you make. Put simply, once you roll-over credit, you are no longer entitled to the 50 days of free credit this card promises. The interest rate charged by card companies is typically a whopping 3 per cent a month or 36 per cent a year.

So, what should you do? One, try and pay your entire bill amount every month. If, for any reason you have to roll over credit, do not use the card again till the entire bill is paid. Or, break a fixed deposit and pay up your dues, thereby saving 24 per cent in interest. Even taking a personal loan at 16 per cent to pay up your dues isn't a bad idea: you'll save 20 per cent in interest costs. Me, I use my credit card like a charge card, clearing all my dues on the prescribed date. I am just the kind of customer card companies hate. You, judging from your proclivity at spending money you don't have, are probably likely to be different.

There's more, and some of this does hold true for an add-on card too. If you lose a card, report it immediately to the issuer. Do not, in your normal laid-back manner, assume that the statement about a minimum loss-liability of Rs 1,000 or so in the user's manual means what it implies. The amount refers to the purchases made after you've reported your card missing. You pay for those made before. I'd also advise you to read the fine print about the value-added services that come with these cards: most come with a hefty service tag. There's no such thing as a free lunch, remember.

I am told there are some guys who use a mean credit card: they invest their cash in highly liquid investments or short-term deposits and pay for everything through their cards. When the statement comes, they cash out and pay the entire amount. I've never been able to do something like this. Perhaps you'd be better than me at something like this. Happy swiping.

Yours affectionately,
Dad.

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