Young must use credit card judiciously

A  recent survey by Cibil threw light on the credit card practices of Indians. First the good bit: Indians are better at settling their credit card dues than their American and Canadian counterparts. Out of 1,100 respondents in eight Indian metros, 92 per cent revealed that they pay more than the minimum balance due, comparing favourably with Canadians (88 per cent) and Americans (89 per cent).  

The bad news is that many Indian respondents revealed a lack of understanding about why they need to pay their due in full on time, or how late payments negatively impact their credit score and by extension, how a poor credit score impacts their financial life.

Only 78 per cent respondents revealed they paid their card dues in full. About 33 per cent said they didn’t understand the benefits of paying more than minimum dues. And not surprisingly, respondents in the 18-25 age bracket revealed lower awareness than those over 35 years.

Takeaways for credit card users
The study provides an opportunity to create greater financial awareness among credit card users. Your credit card balance is a loan provided to you. It is your legal, financial and moral obligation to repay it in a timely manner. There are consequences of not doing so. Here are some takeaways for credit card users — especially the inexperienced ones.

Know Your Card Charges: Your credit card is not “free”. Beyond the interest-free period, you will be charged a hefty interest rate on your dues along with late payment fees. This may be in addition to annual fee that your card may attract. The card’s annualised interest rate could be anywhere between 20 and 40 per cent, depending on the card’s policies. This makes credit card debt one of the most expensive forms of debt. To put that into perspective, personal loan rates are hovering 11 per cent. This makes it necessary to treat it carefully.  

Watch Your Credit Score Impact: All your credit card use reflects in your credit history which is shared by card and loan companies with credit rating agencies such as Cibil and Experian. Late payments and defaults will reflect in your credit history for years. Also, if you frequently reach your spending limit, it reveals a credit-hungriness on your part which works against you in your credit score determination. Restrict your credit card use to 20-30 per cent of your spending limit for best results. You can do this by either reducing your card use, or by asking for a higher spending limit, or by splitting your expenses between multiple credit cards.

You May Need A Loan In The Future: Delayed card payments and defaults will damage your credit score. As of today, the best interest rate on loan products are available to customers with credit scores of 750 or more. Injudicious use of credit card today will make it difficult for you to avail loans and credit cards in the future.

Limit Your Credit Use: Disciplined use of your credit card is key to creating a good credit history. Ask yourself under what circumstances would you like to take a loan. This should ideally be a situation where you're unable to finance an urgent or critical need. Also, it should not be for meeting your everyday expenses, which you should do out of your regular disposable income. Wherever you can, rely on your debit card. This guideline will help you spend within your means and your credit use under check.

Settle Dues In Full, On Time: The idea of a minimum payment may lull some credit card users into believing that it is enough. This couldn't be further from the truth. When you use your credit card, you should be sure that you'll be able to settle the dues in full and on time.

The writer is CEO, BankBazaar.com