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BW Businessworld

Layman's Guide To Plastic Money

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Credit Cards and Debit Cards have become synonymous with money in one's pocket, at least in the urban setup. Their penetration is increasing at a pace one couldn't have possibly imagined a couple of years ago.  Age-old institutions like the Indian Railways are now asking travelers to pay by card,  if not for anything else, but ease of use.

Harsh Roongta, Chief Executive Officer at Apnapaisa.com, a comparative personal finance portal, and Suresh Sadagopan, founder of Ladder 7 Financial Advisories discuss with Tanushree Pillai the advantages and pitfalls of credit and debit cards and how to use them wisely.

What are credit cards and debit cards in layman's terms?
Sadagopan: One can buy things on credit up to the pre-approved limit in a credit card. Basically, you are spending money you may not have now.  A debit card, on the other hand, is linked to the bank account and one can spend up only what is available in one's account. This is equivalent to buying with one's cash. One does not have a chance to spend beyond what one has.

Roongta
: Carrying cash can be cumbersome and dangerous at times. But, plastic cash or credit cards / debit cards make life a lot simpler. These cards can be swiped at almost any listed merchant establishment around the globe for purchasing any product or services. You can also withdraw cash from ATM on your credit / debit card.
 
You can get a credit card from any issuer without any banking relationship with them but debit card is issued only against your bank account. Some secured credit card requires the user to have a fixed deposit with the card-issuing bank.

What are the plus points for using credit/debit cards?
As far as credit cards are concerned, the advantages are
•    Purchase products or services possible whenever and wherever you want, without ready cash and one can pay for them at a later date.
•    Have the option of paying only a part of the total expense. The balance amount can be carried forward, with an interest charged (though the interest rate is very high)
•    Enjoy a credit limit without any charges for a limited period (mostly 20 to 55 days). If you do not pay the full amount on due date,  you are likely to lose free credit period
•    Convenient for very short duration loan where convenience not cost is the consideration
•    Only if one does not have the capacity to pay at the end of the cycle and goes into revolving credit, that the problems start

As far as Debit Cards are concerned the advantages are:
•    Purchase products or services whenever and wherever you want, without the need for carrying cash. The amount gets directly debited to your bank account.
•    Controls unwanted impulsive buying habits, as the user cannot buy anything above his saving account's amount.
•    No interest has to be paid as the amount is directly debited from the account at the time of purchase. Hence, no worries about delayed payment and being penalized.

There must be a lot of disadvantages as well. Why don't you spell these out?
Of course, there are a lot of disadvantages .  As far as credit cards are concerned
•    User may become an impulsive buyer and tend to overspend because of the ease of using credit cards. Cards can encourage the purchasing of goods and services you cannot really afford.
•    Credit cards are a relatively expensive way of obtaining credit if you don't use them carefully, especially because of high interest rates and other costs.
•    Lost or stolen cards may result in some unwanted expense and inconvenience.
•    The use of a large number of credit cards can get you even further into debt.
•    Use of credit card, introduces an element of risk as the card details may fall into the wrong hands resulting in fraudulent purchases on the card. Fraudulent or unauthorized charges may take months to dispute, investigate, and resolve.
•    Any delays in payment results in hefty late payment charges along with high interest rate on amount due and also being reported as default in CIBIL

As far as Debit Cards are concerned
•    No revolving credits facility. The entire amount gets debited from the bank account at one go. Hence user cannot buy now and pay later.
•    Lost or stolen cards may result in some unwanted expense and inconvenience.
•    Using a debit card, introduces an element of risk as the card details may fall into the wrong hands resulting in fraudulent purchases on the card.

What are the biggest misconceptions people have about credit cards?
People are completely mistaken about the concept of revolving credit. It is believed that one pays interest only on the outstanding bill amount. But the truth is whatever new purchases one make during revolving credit facility, the new purchases gets added to old dues and the interest is charged on the entire amount (i.e. old dues + new purchases)
•    Cash withdrawal on credit card is about the same as using a debit card at an ATM – cash withdrawal on credit card can cost the card holder minimum Rs. 300 per transaction or up to 2.5 per cent of amount withdrawn, whichever is higher.
•    Paying minimum amount due on your credit card each month is okay – it will save the day temporarily, but will grow into a big debt one day with a very high interest rate.
•    Transferring the balance of one credit card to another is an effective way to manage debt – it will certainly save the user from higher interest rates on revolving credit, but having multiple cards with higher debt will ultimately become unmanageable for most people.

What's the typical payment process involving- interest rates, grace period  (if any),  late fees  etc like?
Maximum credit period usually varies from card to card between 20 and 55 days.  Interest rate on revolving credit facility can go as high as 3. 5 per cent  per month or 42 per  cent per  annum (3.93 per cent per month or 47.19 per cent per annum including service tax). Late payment fees varies between R s  100 to Rs 700 per month plus service tax.

What is the right way of using credit cards?
•    Use debit card instead of credit card for everyday shopping like groceries, clothes, etc.
•    Using credit card excessively in lieu of cash can lead to debt. Always remember credit card is an alternate to money but not money, so use it wisely.
•    Don't get into the habit of paying minimum due as the outstanding amount will pile up into large debt and one can end up paying very high interest rate. Stay within the credit limit. Lower balances are easier to manage.
•    Having large credit card dues will also have a significant impact on your home loan eligibility if required in future. Lenders determine the borrowers ability to take on additional EMI burden vis-à-vis his current net income. Larger the burden, lower the loan eligibility amount.
•    Persistent delays or defaults can affect your credit rating. Defaulting on your credit card dues jeopardizes your ability to get loans or credit cards in future. Even a bad credit history of a co-borrower can ruin your chances of getting a loan.

How does one ensure proper safety of both credit and debit cards?
•    Go for a photo identity credit card. When your photo is imprinted on a card it can double as an identity card as well.
•    Sign your card immediately after receiving it and do not write PIN on the card jacket.
•    Do not lend your card to anybody.
•    Preferably carry your card separately from your wallet
•    While buying a product over the phone or mail order, be sure to note all the details carefully including postal address. Note down the name of the person who spoke to you as well as exact amounts, as these will be necessary in case of a disputed billing statement.
•    While using your credit / debit card at an ATM, make sure nobody sees you punch in your PIN number.
•    If you lose your card, call and inform the card issuing authorities and make a police complaint as well.
•    Check your card when a merchant returns it and make sure that it is your card that he has returned.
•    As far as possible, try and be present when the card is swiped / the dial-up is taking place to ensure that there is no misuse of the card.
•    Verify the amount before signing the charge–slip.
•    Always verify purchases with your billing statement. Any discrepancies should be informed immediately in writing.
•    Notify any changes in your address / telephone number to the card issuer immediately.
•    Watch out for mobile alerts of spends on your cards and promptly dispute if the debt is unauthorized.
•    Mask the CVV number  as this can be misused to transact by someone who knows one's card no. Ideally, CVV numbers should be committed to memory ideally.

How does the process of balance transfer work?
It is a facility where an outstanding balance on one credit card is transferred to another at a small fee or at a lesser interest rate for a pre-determined period .  This is an introductory incentive offered to customers by credit card companies who want to acquire customers by weaning them away from their present credit card companies. A new credit card company may be willing to take over up to 75 per cent of the amount outstanding on the customers' old card to his new credit card account with them at a lower rate of interest.

Normally the user is given a time limit of six months at a lower rate of interest to clear his transferred amount. However, user could possibly be charged a higher rate of interest for new purchases. If the user is unable to clear his balance transfer amount within six months, he will end up paying a higher rate of interest with the new credit card company also.

How can one have multiple credit cards without getting trapped into a web of unending debt?
Roongta:  Different credit card companies have different monthly billing cycles. Therefore, if you have access to different credit cards, you are in a position to make full use of the interest-free grace period provided by the respective card companies.

Whenever one applies for a credit card, the card issuer pulls his credit history from the CIBIL, which gets registered as an enquiry in his credit report. Excessive numbers of such enquiries indicates that he is "Credit Hungry" and in an urgent need of money. This makes the providers more cautious while evaluating his application for credit cards or any loans.

Sadagopan: It is better to have one credit card and use it and pay off the amounts on time. Going for another credit card just to borrow to pay off a third credit card will be a dumb thing to do. It may be a better idea to take a personal loan and payoff the credit card debt as personal loans come at lesser interest rate as compared to credit card debt.