When I was in school I used to wonder about credit cards. Amusingly, I had the notion that it was a card which allowed you to buy whatever you want without paying cash. Never knew then that one had to return the money.
When I was in college I longed for a credit card. By then I had acquired the idea that you have to pay back the money for the stuff you buy with that card but was not aware of the interesting part.
Today, I have two credit cards! And I want to share my bitter and paradisiacal experiences about them. Please note that the situation in other countries(other than India) might be different.
How it hurts?
If you are like one of my friend who want to possess a credit card for the sake of crowing, think twice! Credit Card costs! One has to pay the annual fees for the card which varies on an average from 500 to 900 rupees annually. Then you have the additional annual costs of the VISA or MASTERCARD(the two most popular) which is approximately 500 rupees. Thus, it costs roughly 1500 rupees. If you are lucky(like I was) you can get a free credit card which means that the annual fees of the card is waived off but hey you still have to pay for the VISA/MASTERCARD. Don’t be under the illusion that you will bear no costs at all. There is no free lunch, my friend.
There is more to it. You have to make your payments on time. There is a statement date and then there is a due date. Every month your statements are generated on the specific statement date which one has to pay back by the due date in the month.
Failure do so results in heavy charges:
2.5% -2.95% interest p.m(whopping 30% - 35.4% p.a)
Interests on interests(or late fees) in case you do not pay interests on time.
There is a minimum amount which you must pay back else you will be charged for that as well. Telling you you will be throughly charged up to see your bills/statements. Have to take trouble to drop the cheques/drafts in their box(which could be very far from your office).
A major problem that most people face is with the statement. Some of them don’t receive the statements at all or do not receive it on time - * could be a genuine postal problem or a lapse from the bank’s side. On such occasions one must follow up with the bank(through phone service) or by personally approaching the staff in the bank. I had to go through this hassle only once. The other problem that you might face is that of forgery. Some wrong entries in your statement can lead to a lot of tensions depending upon the amount of the wrong entry. Surprise! Surprise! Also know that if you have purchased something for 10, 000 rupees and return 8, 000 rupees before the due date, the interest is still calculated on the 10, 000 rupees(not the remaining amount i.e 2, 000 rupees)!
Never take cash through your credit card. You are immediately liable for a 3.5% transaction charge plus 2.95%(approximately) p.m interest charge.
For those of you who are abroad and spending with your credit card, remember that the exchange rate used for the transactions are very high. I had this problem but could not do much about it. They had used an exchange rate which was higher than any site I could check on.
In case you are very lazy, try to have the credit card with the same bank where you have your savings account so you can make an online payment or have an automatic debit from your saving account to your credit card account.
How it helps?
For those who are new to their jobs, it will be extremely useful. It comes in handy when a big expenditure ensues especially towards the end of the month like - buying an expensive gift for your wife, treating some surprise guests in restaurants, buying some costly apparels, or for that matter anything for which you do not have enough money. It saves you from the humilation of borrowing money from friends and relatives.
The more you shop with the credit card, the more points you make which can be redeemed for some gift or can be availed to pay for the annual fees of the card. One must try to cover up for the annual fees atleast. There are many other benefits:
Helps you get an easy loan for a high value purchase.
Most of the cards give you a free personal accident insurance.
3. Purchase protection i.e the stuff that you buy with your credit card is generally insured against theft/damage. So if I buy a diamond ring with my credit card and somebody steals it, I won’t frown but hey there are limits which differs from bank to bank
Travel protection Plan: At least my card(Standard Chartered) has this benefit through which I have benefited. It gives amount coverage of a few hundred dollars for baggage delay, baggage lost, delayed flights, missed flights, loss of passport/visa and even for getting hijacked!
Discounts: You can get discounts on various products, in restaurants, on air tickets when purchased through your credit card. So carry it all the time.
Smart usage
Whether Credit Card hurts you or helps you depends on how smartly you use the card. Firstly find out about all the benefits that are offered with the credit card. Various banks have various benefits attached to the credit card. Choose the one offering you the maximum benefits. The time given for payment is generally 20 days from your statement day. And you get the statements every month(i.e approximately every 30 days). So you can purchase some products with your credit card and pay back back after a maximum of 50 days and a minimum of 20 days. Try to make the most of this time. Even if I have enough money, I let it generate interests in the bank and use my credit card to gain points. I ultimately end up spending enough(about 60, 000 rupees) to cover up for my annual fees. A word of caution: if you think you cannot spend so much in a year and would never need a financial help(you have very generous relatives and friends to lend you money when needed), do not go for the credit card! You can survive without it.
I spend enough to cover up for all kind of annual charges. I keep track of the due date and statement date. I take full advantage of the discounts at various hotels, flight tickets and shops.* I am smart with my credit card*. That’s why I consider it very helpful. Credit card gives me a sense of financial confidence and also relieves me from the pain in my . purse(don’t have to carry cash). It gives me protection . remember all the insurances! Moreover, it gives me a reason to be smart:-)