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Home > Business > Special

Credit card: Don't overspend, or else

Rishi Nathany | February 12, 2007

Ever wondered why your solitary salary cheque loses its battle every month against dozens of bills and credit card statements?

To save yourself from losing the war, do you try to ration the money in hand to juggle with your credit card dues and keep paying minimum amount due with interest to keep the ball rolling?

Ever wondered why you just can't get out of your credit card debt and why the outstanding never seems to decrease? If such is your case, you are not the only one waging this losing war.

History repeats itself

We have heard many stories of village money lenders charging exorbitant interest rates from farmers and labourers, who would stay in their clutches for generations and would never be able to pay back the principal, let alone interest. That money lender has reappeared in a new avatar among India's urban populace - credit card.

The use...

Before we continue with discussing the pitfalls of credit card, let us give due credit to it for the benefits. Credit card was created as a useful tool to tide over financial emergencies and reduce cumbersome cash transactions.

The idea is to repay the amount borrowed fully and before the due date. If this practice is followed, then one is making best use of a great innovation.

...and the abuse

However, when credit card becomes an instrument to feed the ever-expanding desire for consumerism, fanned by easy availability of credit and lots of marketing hype, it turns into a foe, rather than a friend.

Getting caught in the spiral

Of late, it has become a disturbing trend - especially among young people - to live beyond one's means.

Factors such as peer pressure and a desire to be socially acceptable, an absence of any immediate responsibilities and, thus, enjoy life, and easily available jobs drive young people to live beyond their means - they forget the cliche: Cut your coat according to your cloth.

They start spending on credit cards much before receiving salaries - and may be much more than their salaries would be.

In most cases, salary receipts are used to fund the minimum payments due on the cards. Steps such as having multiple credit cards and transferring balances from one card to another are resorted to, as the debt begins gyrating.

The spending pattern sees no signs of abatement and very soon, salaries are not enough to even cover the minimum payments due, let alone repay the debts on the cards.

At this stage, the spenders start panicking. Limits start getting frozen and cards suspended along with a host of extra charges for non-payment. Defaults lead to calls and visits from collection agencies. Is there a way out?

A ray of hope

All is not lost as yet. There is a way out of this mess. However, this requires a lot of discipline, patience, resilience and austerity. Remember, one has to not only get out of this mess, but also stay out in future!

Let us explore some of the ways to do just that:

Confide in your loved ones and make a promise to yourself - Half the battle is won when you learn to confront your fears and face the problem head-on. The first step to solving the problem is acknowledging it and sharing it with your loved ones and promising with a steely resolve not to repeat the same mistake. Their support, emotional or even financial, will definitely help you get out of this dreadful situation faster.

Liquidate investments - Most credit cards charge phenomenally high rates of interest, around 36 per cent a year. This is a tall order for any investment to reach. Therefore, it does not make sense to have an investment fetching much lower returns, while you pay such high interest rates on your credit card.

Sell such investments to pay off the card dues. Remember, this should be a one-time exercise, or you won't have any investments left very soon! Once this is done, use the monthly income that was going into payments for credit cards, to replenish the liquidated asset.

Borrow cheap, repay dear - Try taking loans against your insurance policies, PPF etc to repay the credit card loan. If such loans are not available, then try to take personal loans, which are easily available these days, to pay off the credit card debt. Then use the monthly income used to pay the credit card to repay these loans. The savings on interest payments will be substantial.

Save more, spend less - Try to bring fiscal discipline in your life. Learn to budget your expenses so that you can save as much as possible to repay your credit card debts. Try to pay more than the minimum amount due every month. Slowly you will see that the dues are decreasing.

Spend cash - Stop spending on your credit card, and use it only for emergencies. That is, start paying cash for expenses. That will make you conscious of how much you are spending and will help you remain within your budget.

Debit for credit - Get rid of you credit cards as soon as you pay off the dues on them. Having multiple cards does not make sense - this does not help your cause at all, especially if you have to pay annual fees on them. Just keep one or two for emergencies. Get a debit card for your regular expenses.

Debit cards have the advantage of cashless transactions, while letting you spend only what you have in your bank accounts. Debit card, therefore, reduces the chances of your overspending in bouts of indulgence.

Rounding it off

The above tips can help you go a long way in getting and staying out of credit card debt trap. At the end of the day, it depends on your sense of fiscal discipline, which determines the use, or the abuse, of this facility.

There are many ways to spend smartly

  • Most credit cards charge phenomenally high rates of interest. Sell investments, which fetch you lower returns, to pay off card dues
  • Take loans against your insurance policies, PPF etc to repay the credit card loan. If such loans are not available, then try to take personal loans, which are easily available these days.
  • Try to bring fiscal discipline in your life. Learn to budget your expenses so that you can save as much as possible to repay your credit card debts.
  • Use your credit card only for emergencies. Start paying cash for expenses.
The writer is a financial planner

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