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Larissa Fernand

Credit card issuers are quick to woo you with statements like "You only need to settle five per cent of your outstandings, the balance you are free to roll over." And you are convinced that the credit card is the best thing that could have happened to you.

What they are slow to inform you on is that once you do utilise this 'convenience,' you have taken the first step to land yourself in a debt trap. Of course, that is exactly what they want (after all, how else are to make money on the card?).

Here's how it works. The moment you realise that you cannot settle your entire bill, you start revolving credit. That means, you only pay a part of the credit card bill. The balance you roll over till the next settlement. That's where the good part ends.

Once you do this, you are not entitled to a free credit line anymore. The interest is to be paid on the amount you roll over as well any other expenditure you start making on your card. In effect, you pay for each and every transaction.

Now, the rate of interest is levied continuously till the entire bill is repaid. With each and every transaction being charged, all your spending automatically gets caught up in the revolving credit.

Let's put figures to this. Assume that on a bill of Rs 20,000, you pay just Rs 1,000 and revolve the balance Rs 19,000. The interest of, say, 2 per cent per month will be levied on Rs 19,000 and every transaction made after that. So all your spending in the following billing cycle will be subject to a 2 per cent interest. Now not only are you paying 2 per cent on the balance Rs 19,000 but even on the purchases you now make and everytime you use your card.

Congratulations. With not much effort, you have just entered a debt trap in which you end up spending more than you make and more than you can afford to pay.

In case you think that 2 per cent is too small a price to pay for such credit, think again. That figure is just on a monthly basis. Calculated on an annual basis, that works out to a whopping 24 per cent per annum.

Lesson to be learnt: Use your card to extend your income and the only thing that gets extended is your debt.

What you should know if you utilise this facility

• View credit only as a convenience. Revolve it only if you really don't have a choice.
• The faster you settle your bill, the less you pay by way of interest. So work hard towards repaying it as soon as possible.
• Restrict use of the card until all bills are settled. Make most of your payments in cash, cheque or even utilise another credit card, if you have one.
• If you do revolve credit often, apply for a card with a lower interest rate (however slight) even if it has a higher membership or annual fee.
• Some players offer to pay off your card bill if you switch cards and opt for theirs. But they will offer a low rate of interest only for the first few months. After which, the commercial rates apply. Opt for it and set a goal whereby you repay your loan within this time frame.

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