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Experts Whisper

Ask the fundamental question?

Are you using plastic to pay for items you used to buy with cash? Are you confused about how the outstanding on your card keeps increasing every month? Do you feel sometimes that you have been singled out as a victim in a colossal, well kept campaign by the card company to get you to part with your fortunes?

Don`t fret about it, as suggestions below will help you bypass the pitfalls inherent in the world of cards.

First, wake up and smell the coffee - and know the fundamental truth!

There is nothing like free lunch in this world. When you use a credit card, it comes at a cost. There are annual fees, which range from as low as Rs 250 to Rs 2000, depending upon type of card (Standard, Gold, Platinum etc). More important, there is the interest charged on holding off the payment beyond due date. But at the same time, you do get many benefits like free credit period, discounts on air and rail travel, express loans etc.

So deciding on choosing the right card should be a trade off between the cost involved in holding a card and the benefits enjoyed from it. Again, a higher Air accident Insurance shouldn’t become an important factor for buying a Gold card and not a Silver card, for a person who rarely travels by air. The fundamental question every prospective cardholder should ask is "Does this feature make any difference to me?" The Card Company does make a big scene about the benefits of holding their cards. But, it is the prospective cardholder’s responsibility to differentiate between the nice and the desired ones.

The big trick - its in the fine print.

OK - here's the big trick - suppose you make purchases through the card worth Rs 10,000. On the due date, the card company gives the option to pay a part of the outstanding amount (in this case, Rs 10,000), say 5%. The rest of the amount can be carried forward to the next billing cycle. Nearly seven out of ten cardholders do this. Neat of the card companies to offer this, they probably think.

Here's the catch - the minute the cardholder does this, he's lost the free credit privilege. On any cycle! Till he pays off the balance amount.

Let this sink in - its important - the amount rolled over (in our hypothetical example, Rs 9,500) PLUS any fresh purchases made through the card together get charged an interest of a whopping 36% p.a. till the payment.
That means the sweet hook of allowing a person to pay only 5% and roll-over the balance actually means a whopping high charge on the balance AND on fresh purchases made on the card.

Would you still pay only 5%? Chances are that many of you won't.
Of course, if you dont even pay the 5%, you are slapped with a penalty of around 2% of the outstanding immedeiately.


Retire your Debt

There's more than one compelling reason to retire costly credit card debt. Truth is, it's next to impossible without risking your money to get a return of 36 per cent even from the stock market, l eave alone conservative investment options like bank or company deposits.
Let's assume you're earning sufficiently high returns on the stock market to meet your credit card interest payment. To equal the average 36 per cent annual outflow on your outstanding card balanc e, the appreciation in the stock prices on your portfolio would have to be at least 45 per cent to cover the long-term-capital gains tax (at 20 per cent) of 9 per cent on this income.
So if you have money idling in a savings bank account, take it out and clear your card dues. It ma kes sense to even break a fixed deposit that might mature in, say, six months to pay off card bill s that you'd have paid in three months.

Read between the lines

es most of the literature that flood your mailbox head straight into the dustbin. For instance checkout the lost card liability before reporting the loss for the cardholder. Often, what is advertised is the liability after reporting the loss. Before reporting, the liability is unlimited which means you are responsible for all the purchases made through the stolen card till the time it is reported. One important thing which is strange but true—your credit card can be used to spend several times what you are actually entitled to spend.
Sometimes renewal fees are just billed in your statement. So it is better to cross check the items on the bill with the charge slip. Then, the card companies give a mild notice about an upgrade of class of card say from Classic to Gold and they take it as a ‘Yes’ if you don’t say `No’.


Be discreet

One often runs into people offering a free holiday package or doing a survey at a petrol pump. Usually they ask you to fill out forms that ask for details about your work, office, home, car, the kind of cards you have, the expiry date of the cards and your date of birth. The card expiry date and your date of birth are the key things. Part with that information and you may be walking into a trap.

Generally card companies confirm personal details like birth date, card limit etc before disclosing details about the card. Any person can misuse the card after having access to these kinds of information. Check the section "Tips for card users" which gives a list of Do’s and Don’ts while using a card.

Don’t be an ostrich!

Don't trust the future to cure today's problems. Card users are often wishful spenders and convince themselves that they will have the money to pay up by the time the bill comes. They don't look at their overall indebtedness because that can be scary.
Another common trap is to focus on monthly payments rather than the overall debt. An amount of Rs 5000 might not look that scary, but that’s how a beginning is made. If only credit card junkies saw the big picture, they might stop short of charging frivolous purchases.

Make a beginning

For many troubled debtors, the financial scars won't go away in a hurry. But being wary of the pit-falls in future will help you jettison the high-spending lifestyle and embrace a debt-free life.


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