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A double-edged facility

Inappropriate management of credit card could put you in trouble, writes Vyas Mohan.

india Updated: Apr 18, 2007 21:59 IST
Vyas Mohan

Do not accustom yourself to consider debt as an inconvenience; you will find it a calamity, goes a proverb. Inappropriate management of credit card could put you in trouble. However, if managed properly and responsibly, a credit card could come handy and even turn out to be a money-saver. Read on to know the basics to managing your card.

In the case of credit cards, it is better to go to bed without supper than rise in debt. If you cannot afford it, do not buy a credit card. Be aware that most banks charge additional fees and higher interest rates for late payments of credit card dues. Hence, use a credit card only if you are sure of making payments within a realistic period.

Making the most out of your card starts with picking the right card to suit your need and then minimising costs, including interest payments. For those who are of the kind to clear the outstanding balance each month within the due date, interest costs on the card would not be a matter of concern. In such cases, it is better to go for cards that carry rewards.

Reducing interest payments on your card to the maximum possible extent is the best way of using it. If possible, pay the entire outstanding amount before the due date on your statement or at least the minimum payable amount.

Here is an example of how interest is calculated on your card’s outstanding.

Say you have paid part of the March outstanding and the statement generated on April 17 shows an outstanding of Rs 5,000. You pay Rs 2,000 on April 25 and make a purchase worth Rs 1,000 on April 30. No further payments are made till May 17. Then the interest calculation (at 37 per cent per year) on your outstanding will be as follows – Rs 40.54 on Rs 5,000 for eight days from April 17 to April 25 (5000X37/100)X8/365,

Rs 15.20 on the balance Rs 3,000 for five days from April 25 to April 30 (3000X37/100)X5/365, Rs 68.93 on the balance Rs 4,000 (including the purchase worth Rs 1,000) for 17 days till May 17 (4000X37/100)X17/365. Therefore, the total interest charged on the said transaction is Rs 124.67.

As is clear from the example, if you spend Rs 5,000 from your card and only pay the minimum due amount each month, it would take years to close the debt. Hence, one should always try to pay up the maximum possible sum towards an early closure of dues.

A credit card should not be used to withdraw cash from the bank, unless there is a real emergency. Most banks charge a fee for cash withdrawals using credit cards above the already higher interest rates they charge. Unlike purchases, the interest on cash withdrawal using credit cards would be calculated from the day you receive cash and not from the day the statement is generated.

Further, prompt management of credit card gives one an unspoken advantage when it comes to fund raising. There is no better way to prove the lender of your credit worthiness than having a clean credit card history. Loan approvals come easy to a punctual manager of credit cards.