Understanding Credit Cards, EMI and loans.

Let us understand the usage of credit cards in a country like India.

 

A lot of people use credit cards for buying things even if the thing is not affordable to them. A lot of people say that credit cards are good if you use them intelligently and judiciously. You get cash back, rewards points, free tickets, and other offers. Great to hear and think that I will use credit cards only when needed and extremely cautiously. 

But the reality is DO NOT USE CREDIT CARDS.

I REPEAT, DO NOT USE CREDIT CARDS.

You do not need it, no matter what anyone says or how many benefits of credit cards you read or come to know about.

Let us understand a few basic points about Credit Cards:

It's a type of card you can purchase whatever you want through that credit card (upto a certain limit), without having money in your bank account.

The bank pays for you.

But, you'll have to pay the sum you used to the bank after a specific time.

Imagine, Amit purchases a credit card from HDFC Bank on 1st January.

The credit card limit is upto 50,000.

Now, Amit spends 40,000 on 1st January itself. His credit card bill of 40,000 rs. will come on 30th of January.

And he will have 20 days after his bill came, to pay this bill.

So, he has to pay 40,000 by 20th February as his bill came on 30th January.

Bill comes for the entire month. So, whether he used entire 40,000 on 1st January or 25th January, the bill of January month will come on 30th January and he will get 20 days to pay the bill.

If, Amit pays entire 40,000 rs before 20th February then he doesn't have to pay any interest, just 40,000.

Yes, that's right!

But Why do you think bank gives you money without interest? Why do they force people to have a credit card? Why are banks distributing their money free of cost?

It's a trap.

That's because :

Banks give you credit card so that you use it blindly. Bank wants you to use 50,000 even if you have 30,000 salary, so that you will be unable to return that money within 50 days. Then, they will charge interest (25%, 35%,etc) from day 1 (ie January 1 for Amit case.)

Money paid within 50 days - No Interest. Money paid after 50 days - Interest from day 1 that is interest from January 1st. Even if you pay the amount on 51st day (1 day late), you will be charged interest for 51 days and not 1 day.

This is the reason a credit card is dangerous as you lose lots of money even if you get late by 1 day for any reason. And then this debt cycle continues. Your ratings fall down and if you are frequently late in paying credit cards bill, you will have very difficulty in getting loans during any kind of emergency as your credit card linked CIBIL SCORE will fall and all loan-giving companies check CIBIL score before giving loans.

Also, you can use your credit card as bank atm card and take money out from credit card. The money will not come out of YOUR OWN bank account but your bank will give you cash even if you do not have any money in your account. But you will have to return this money to the bank and you will be charged interest even if you pay after 1 day because 50 days no interest period doesn't apply to cash withdrawals using credit card. You don't get 50 days to pay the bill. You'll be charged Interest even if you pay before 50 days. SO, DO NOT TAKE MONEY OUT USING CREDIT CARD.

I understand that some of you might disagree with me. Credit cards are good products if used in proper ways. It gives benefits too, I agree. Access to great lounges and services, cashback, tickets for free, points are the main benefits. But keeping in mind the unchecked spending habits of most Indians and the lack of financial knowledge, I strongly recommend you avoid using credit cards. The only person who should keep a credit card is if you have a very good understanding of finance or you have spent at least 3-4 years in the stock market or in management of money properly. But still,  if you want to keep a credit card or use it, first of all, try to study basics of finance and money management. You do not have to become expert but basic idea of money management is important. Also, learn to increase your earnings and savings, and decrease your un-necessary expenses. The most important thing is to increase your earning by learning new skills, acquiring knowledge etc. Only then consider yourself qualified to keep a credit card. 

And if you are already trapped in credit card debt, just take a personal loan from a bank or from friend or relative and pay the credit card company Aand then surrender your credit card to the company. Credit cards have the highest interest rate, much higher than personal loans from banks. Suppose you have debt of 50,000 rs in credit card and you will have to pay 36% interest rate. Just take a personal loan of 50,000 from bank at 15% and pay the money. This way, instead of 35% interest on credit card, you will have to pay 15% interest to bank. Remember, this will not work everytime if you already have a bad record of payment to credit card as your CIBIL score will be low and bank will not give you loan. 

Credit card is the product that banks and finance companies advertise the most. They try to sell credit cards more than anything. It is because it gives them maximum profit. And this profit is made by ROBBING you of your money.

Never buy anything, small or big, on EMI or credit card. NEVER.

 

Always pay the full amount in cash or debit card or UPI.

The only reasonable exceptions for EMI are house loans, education loans, health and car loans (if car is necessary) because these 4 are important expenses.

 

Apart from these 4 things, you do not have to use the EMI payment option on anything. No mobile, no clothes, no gifts nothing should be purchased on EMI. And forget about keeping a credit card at all unless you are a millionaire.

That's it. I will keep it short and simple.

Remember, NO CREDIT CARD. NO EMI. NO LOAN (other than house loan, education loan, health, and car loan if needed). 

And if you take any loan, whether house or education or you have already taken any loan or any EMI is going on, stop all other investments and unnecessary expenses and pay the loan first. Loan interests, Credit card interests, and EMI interests are very high and they keep compounding and growing very fast.

Credit cards, EMI, and loans can ruin families. Don't take them and if taken, pay them as soon as possible.

Buy items only you can make full payment while purchasing. If you cannot pay for something, do not buy it. 

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