If you were to ask anyone with old school of thought, he would only ask you to refrain from overspending. For ages, the Indians have been prudent in both their borrowing and spending. While on one hand borrowing was to be avoided under all circumstances, the spending was to be curtailed by all means. Even today’s financial pundits would vouch for these two important parameters and you can find various recommendations on how following these two facets could lead to financial freedom. However, with the advent to easy credit, both timeless practices have taken a toll.
Credit cards while on one hand are a great financial instruments that extends security and convenience, but the card holders have not been able to restrain themselves on over use. As we all know that excessive use of anything in life can be a cause of concern, so is the case with the charges on credit cards. And if you are one of those who uses the credit cards for everything and pay in parts, then you must read on, since this habit can lead to financial issues.
Have you ever tried to calculate the cost of funds when you revolve credit on the cards? Normally people think that it comes at about 3% interest rate. While it is right (generally the interest ranges from about 3% to 3.5%), but your calculation is wrong. Do not be shocked to know that the actual cost of credit can be as high as 50% per annum. Surprised? Let us understand this from an example. In case you have an outstanding of Rs 50,000 and decide to repay the minimum amount due (which is 5% of the total amount due), it will take you almost 9 years to repay the complete amount. You would pay 125% of the principal outstanding, if you complete cease to charge your card with any fresh purchase.
By no standard is this a small amount. If you were able to save this amount, just by the power of cumulative interest, the figure will turn into a large amount that could be utilized for various needs.
Do you know that the credit cards are the biggest culprit for pushing one into debt trap? Before we dwell into this further, you need to have a clarity on what can be defined as the debt trap. It is a situation where you would find a large debt glaring at your face and you do not have adequate inflow of money to meet the repayment. As the name goes, it traps a person into a vicious cycle and adds to stress.
To have a better clarity, let us also define what is an overuse of the cards? This is when you have spent more than what you could pay in one go at the end of the billing cycle. The continued use of card without paying off total outstanding, inches one closer to the prescribed limit. Maxing out on the limit leads to charges, interest and taxes. As per card companies’ policies, the repayment first gets adjusted towards the interest and charges and only balance gets set off against the principal.
You need to be aware that your current payable to the banks has an impact on the credit profile. This is termed as credit utilization and in case of a higher outstanding, the bureau score can take a sever beating and lead to a situation where one can find the name reflecting in the loan defaulter list. A good bureau score is important for continued access to the funds and meeting one’s financial objectives.
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