Rediff India Abroad
 Rediff India Abroad Home  |  All the sections


The Web

India Abroad

Sign up today!

Article Tools
Email this article
Top emailed links
Print this article
Contact the editors
Discuss this article
Home > Business > Personal Finance

The credit card trap. Beware!

Mobis Philipose in Mumbai | September 02, 2004 10:09 IST

For most of us, credit cards means that ubiquitous piece of plastic that can be used in millions of establishments across the globe to pay for stuff, or swiped at ATMs to get cash.

But the most convenient -- and very infrequently used -- function a credit card company offers is the 'revolving' credit facility.

Under this, a customer can pay just 5 per cent of the outstanding bill amount and roll over the balance credit to the next billing cycle.

That's convenient. So where's the catch? It comes in the form of transaction charges levied on such rollovers. After all, it has to be convenient for the lender as well.

In most cases, this charge for revolving credit or for the cash advance facility is 2.95 per cent a month or 35 per cent per annum. The rate is set high so that the guys who pay make up for the many who don't.

When the annual rate of interest is as high as that, it can be big trouble.

Consider this: if you have an outstanding worth Rs 50,000 on your credit card and chose to pay only the minimum amount due, it would take well over 40 years for you to clear the bill (based on the assumption that no other purchase is made on the card from hereon!).

Also, by that time, you would have paid more than Rs 140,000, which means an interest outgo of more than Rs 90,000 -- notwithstanding the annual fees, which would work out to at least another Rs 20,000.

But that's only if you continue paying the minimum amount due till the last paisa is paid. However, what if you find a debt trap looming and would prefer to get out when the outstanding amount has been brought down to manageable levels of say Rs 5,000?

Well, in that case, the payment period reduces considerably to around 11 years. But even then the total payment to the card company would be over Rs 133,000, resulting in an interest outgo of Rs 83,000.

How does one avoid such a huge interest outgo? Two rules can come in very handy:

Rule # 1: Never pay only the minimum amount due. Pay more.

The card company may ask for only 5 per cent of the outstanding amount, but nothing's stopping you from 10 per cent, or for that matter even 100 per cent.

In the above example, if 10 per cent of the outstanding amount was repaid every month, it would take less than 3 years for the outstanding to fall below Rs 5,000. What's more, the total outgo would fall dramatically to Rs 72,000 and the interest outgo would be Rs 22,000.

Rule # 2: Ask the card company for a lower interest rate.

Is that possible? Yes. It so happens that if you have a clean repayment history (at least minimum balance) and your outstanding is less than 75 per cent of your credit limit, a number of your card company's competitors will let you transfer your balance for a lower interest rate of around 1.75 per cent per month (this rate, however, applies only for a limited period).

Most of the time, you don't have to go through the hassle of changing banks. You can ask your own company instead to match that rate. Let's assume you just can't increase your monthly outgo beyond the "minimum amount due", but manage to get the interest rate lowered to 1.75 per cent.

In this case, it would take around 6 years to get the outstanding below Rs 5,000, and by that time the total outgo would be Rs 78,000.

The interest outgo of Rs 28,000 is still far lower than the Rs 78,000 outgo we started with.

Obviously, it would be much better if you bring both rules into play. If the repayment is stepped up to 10 per cent and the interest rate is also lower at 1.75 per cent, the outgo would be much lower at Rs 61000, resulting in an interest outgo of just Rs 11,000.

Powered by

Share your comments

 What do you think about the story?

Read what others have to say:

Number of User Comments: 23

Sub: Plastic is definitely not elastic !!!!

Thank you for your informative article.Plastic gives an illusory feeling of well-being and you simply cannot stretch your credit indefinitely.It makes sense to make regular ...

Posted by shoumit

Sub: Wake up immediately to book these credit cards institutions!

Credit card menace has taken off so openly with wide publicity that perhaps it is latest form of a scam or public loot! We hear ...

Posted by B.Gautam

Sub: Credit cards, big fraud.

Thanks for tackling this major fraud. Must forward our displeasure to appropriate authority. Besides the comments posted by other sufferers, to which I agree, Along ...

Posted by Neelu Kapoor

Sub: Credit Card info.

The article is of utmost usage to people who have 8-10 credit cards with them but don't know the consequences.

Posted by Vanita Sehgal

Sub: Debt Free Life is King's Life!!!

Never lead a debt prone life. It's similar to that of hell may be a hell when you are alive. Lead a Debt Free Life, ...

Posted by Pawan



Copyright 2006 India Limited. All Rights Reserved.