Are you living on credit?

Last Updated: Fri, Dec 28, 2012 04:15 hrs

It was a lean year for consumers. Salary hikes, if at all, were nominal. Then, there was inflation that ate into savings. But here is a surprising number – credit card expenses went up 21 per cent between September 2011 and September 2012, according to data from the Reserve Bank of India.

Given that the number of cards went up only three per cent – from 17.6 million in 2011 to 18.3 million in 2012, surely people are spending more through credit. The average per card dues have gone up 17 per cent. In 2011 it was Rs 10,738 and it has increased to Rs 12,568 in 2012.

The answer lies in a visit to any mall. A large number of customers swipe cards for even the smallest household expenses. Then, there are online purchases. But higher expenditure through credit cards is not the worrisome part.

The worst part, as bankers say, is that the average revolving (rollover of expenses on card) is at least 30 per cent of the money. So, for the sake of simplicity, on dues of Rs 23,000 crore (as on September 20), the average rollover by customers will be Rs 6,900 crore. The potential interest payout: Rs 2,070 crore to Rs 3,450 crore (at 30 to 50 per cent interest rate), unless customers stop or reduce revolving their credit. But 30 per cent is just an average figure. Many customers pay barely 5-10 per cent monthly, to keep the credit card active.

As an individual, if you are a shopaholic or spend through cards impulsively, it is time prudence took over. If you have spent Rs 2 lakh on a credit card and keep paying the minimum five per cent every month, even if you do not incur any further expenses, it will take you at least a few years to clear all the dues. This is because while you are clearing five per cent, the bank is imposing an interest of three-four per cent monthly on the dues.

So, net-net, you are clearing just one per cent of the outstanding every month. So, this repayment can continue for years. The simple way to resolve this is to take a cheaper loan, in the absence of own funds, and wipe out the credit card dues. A personal loan, even at 15-18 per cent annual rates, in not that harmful.

There are many good uses of credit cards, simply because of the interest-free period they provide. Most banks give a 45 day period during which you can pay the entire amount. If you are travelling abroad and need to buy tickets and book hotels, this period can be used very effectively. Similarly, if you are expecting some future cash flows but have to make certain necessary purchases, again, credit cards are extremely useful.

Yes, it is boring to count cash when you are out with your friends and many might snigger at you as well, but refrain from swiping that credit card…

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