Credit Cards: Manage Your Finances

A Credit card is the most sensitive product of a bank. Most of the time, we can’t avoid the attractive offers that come with it and enter the world of credit. Only two years ago few banks offered credit cards, but now almost all banks are into the credit card business. Therefore the credit card business definitely provides Canadian banks with more revenue, but do we analyze what we expect from a credit card and exactly where we are driven to? I am trying to explain few things on the whole concept:

Glimpses of Credit card packages that make us jump to our toes:

• Interest free credit period (around 50 to 60 days)

• A financial instrument that can be used almost everywhere, no tension of carrying cash

• Payments can be made partly or in installments.

• Earn reward points that can be utilized to get free gifts and even flight tickets

• Automatic Life insurance coverage

• Additional offers during festive seasons

• Personal loans (pre-approved unsecured loan) against credit card account with attractive rates

• Avail additional discount while booking air / railway tickets, hotel bookings, car fuel purchase etc.

• Emergency cash withdrawal from ATMs

• Money back offer (named as cash back for specific cards).

• Purchase through internet: Few products can be purchased on internet through credit card only

• Now cards are available without any annual charges

• Overall personal status up gradation.

The game starts when we use the credit card for the first time. It feels great after the usage, and seems very convenient too. Slowly people get addicted to it and use at most possible cases, even for shopping grocery.

Some negative factors:

Hidden fees: If payments can’t be made within due date, banks do start charging extra fees. Most of us don’t read the details of interest rate structure given with card kit. There are high interest rates in case of late and default payment.

“Minimum payment due” trap: There is an option of paying a very small amount of the total amount due (say 5% of the total amount due) against each month’s expenses. Banks insists their customer to pay that amount. Even after paying that much amount, bank still charges interest on full value.

Business tie-ups with different companies: Almost everyday banks reach us by phone with various offers. In reality they get associated with different companies to promote product to the credit card holders. For an example, say, AXN bank has tied up with an insurance company and provides health insurance coverage for its customer where payment can be made through is credit card account. The insurance documents are sent at the easiest convenience. Similarly banks try to engage its credit card customer in various programs and pull out money from his pocket. Along with the monthly statement, small brochures of consumer durables and home appliances are attached for business promotion.

EMI payment mode: Payment has never been so convenient. Today we have the option to redeem credit card payments in installments. In case of bigger amount purchase, we can convert it into equated monthly installments (EMI). It gives us the flexibility to redeem the amount partly. Apparently it looks convenient but, in reality it results in very high rates of interest (including processing fees).

Free add-on cards: Banks offer add-on cards to the primary card holder for free. The add-on cards can be used by other family members (children or the spouse of the main card holder) against the same card account. It creates a possibility of additional expenses as well.

Other high risk factors:

1. In case of loss of credit card
2. Card information leakage through net banking
3. Fake transactions may cause harassments

Last but not the least is the effect on the credit report. One default and the account get negatively reported to the credit bureau. Your creditworthiness gets attested by the credit activities that reflect on your report and your credit score. Sometimes this credit rating gets affected without the knowledge of the victim. You might have applied for a card online; it might be so that you did not even complete the application and then forgot about it because the card also never arrived, but suddenly one day while applying for credit somewhere you realize delinquent account reported to the bureau. These mistakes keep happening the one who suffers is you. So whenever it comes to credit cards make sure you are well versed about the pros and cons from the direct source i.e. the bank.

To me, it’s absolutely foolish to give away the maximum part of our monthly income to the bank. It’s definitely not the exact amount that we used to spend before knowing the concept of credit cards. Somewhere in the line we are losing out the balance in the income – expenditure ratio. I guess the main motive is to take away the maximum part of our income by hook or by crook. Under no circumstances, can it be tolerated. So let’s be strict and don’t let the banks win the cool game.