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Being credit happy

An individual can own a credit card to take care of the financial needs but managing the cost needs discipline, writes Arnav Pandya.

india Updated: Sep 26, 2007, 20:11 IST
Arnav Pandya
Arnav Pandya

As individuals use credit cards in increasing numbers there is a flip side to it. The default rate is far higher than in the case of loans taken from financial institutions. As a borrower, one should ensure that he or she is not in a situation where repayment becomes a very difficult task. Here is a guide to keep the situation under control.

The limit

The first mistake that a person makes is by assuming that the limit on his credit card is the extent to which he can spend without any problem. The limit on the card is a figure that has been fixed by the issuing bank. The ability of a person in terms of free cash flow might be completely different. In such a situation, the individual has to ensure that he uses the card only to the extent he is sure about repaying. As this is not done most of them end up spending a big amount on their card and when it comes to payment, they slip into the interest net.

Card expenses and EMI

Often an individual has other loans to repay. This is the reason why he finds that a large part of his income already going towards a particular area. When it comes to an EMI payment on a loan, it is not flexible. The amount will be deducted from the account through the specified payment route under any circumstances. This often leaves little money for other payments. As credit cards have the flexible option of carrying forward, this route is adopted as expenses pile up.

Control expenses

If you are caught in the interest payment situation, then it is necessary to ensure that a plan is ready to get out of it. This will require additional sacrifices and an extra effort to refrain from making several expenses. When such an exercise is undertaken, then there will be some element of control on the overall buildup and will bring the situation to a manageable level. But ensure to make the credit card payment as a priority as the rate charged will be far higher than the cost of other options present.

Use cards judiciously

Usually people hold multiple cards and in most cases it upsets the payment plan as the total outstanding is huge. Managing multiple cards the right way will ensure that the payment is under control. This can be done by having an overall payment limit which is not being exceeded and distributing it among the cards in such a way that the maximum credit period is obtained.

(The writer is a Certified Financial Planner)

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