What's on the Cards...!?!

Credit cards mean different things to different people. To some, it is an easy way to spend. Just swipe the card and you can buy anything, anytime, anywhere...!

To others, it is convenience. You no longer have to carry cash. But the 28 sq cm of plastic in your wallet is also the key to a treasure trove. If you are a smart user, you can use it to unlock the myriad benefits that come with a credit card.

Of course, you need to watch out for the pitfalls that include high interest rates on rollovers, hidden fees and the dangers of falling into a debt trap. But if you are a disciplined borrower, a credit card can actually be a source of free money.

Interest rates are on the rise and borrowing is costlier. But your credit card can help you get an interest-free loan for up to 50 days. Credit cards have a one-month billing cycle and customers usually get 20 days to pay the bill. If you pay the entire bill by the due date, no interest is charged on the credit.

So, if you time your purchases correctly and buy at the beginning of the cycle, the charges will appear only in the next month’s bill and you could get up to 50 days of interest-free credit, or free money.

This strategy works best if you have two or three cards, each with a different billing cycle. You can get your billing cycle changed to be able to optimise on this interest-free credit.

Do keep in mind that this is possible only if you settle your credit card bills in full by the due date. If you roll over the balance by paying the minimum 5% of the bill, you are charged 2-3% a month on the unpaid amount. Plus, you don’t get interest-free credit on new purchases if the billing period starts with a balance.

The more the number of cards, the more careful you have to be about billing cycles and payment dates. If you slip even once during a year, there’s a hefty late payment penalty as well as the interest charged on the balance which could wipe out the gains of several months of careful spending.

Dropping a cheque in the drop box on or before the due date is not enough. Credit card companies consider a payment only when the cheque gets credited. So drop it at least 2-3 days before the due date if you don’t want to be slapped with late fees and other charges.

Potential Gain: If you make purchases of Rs 20,000 every month and avail of 30 days of free credit in every billing cycle, you can gain Rs 1,600 in a year.

Every time you swipe your card, you earn reward points. Some cards give you 1 point for every Rs 100 spent. Others, especially co-branded cards, are more generous, but they give reward points only for specified usage. For instance, the SBI Spice Jet Credit Card gives 5 points for every Rs 100 spent for booking a ticket on the airline. Other spending on the card earns the normal 1 point per Rs 100.

You should choose a card depending on your spending pattern. For instance, frequent flyers may find cards co-branded by airlines very useful. They can rack up air miles that can be redeemed for free tickets. The benefits of such cards far outweigh their costs. For instance, the Jet Airways Citibank Platinum card costs Rs 2,500 a year but it not only gives you a complimentary ticket, but also a 5% discount on domestic and 3% off on international airfares. Also, you earn double the air miles on every Jet Airways ticket bought on the card.

It’s important to read the fine print on the reward points. In some entry-level cards, the points have an expiry date. They lapse if they are not redeemed within 12-18 months. However, issuers like to pamper high-end users with points that can be accumulated without fear of lapse. Keep in mind though that inflation works here as well. A gift voucher of Rs 500 that can be bought today for 1,100 points might cost 1,400 points a year later. More importantly, don’t let the card’s reward program make you go out and splurge. Don’t overspend just to earn reward points.

Potential Gain: If you spend Rs 3 lakh a year on your card, you earn 3,000 reward points worth almost Rs 1,800.

When it comes to taking a loan, a credit card is the last thing on your mind. At 36-48% per annum, rolling over a credit card balance is the most expensive form of borrowing. But if you have been a good borrower and paid all your bills in time, your credit card can get you a loan that is cheaper than a personal loan.

A personal loan comes at a rate of almost 18%. The EMI for an Rs 1-lakh loan for a year works out to Rs 9,168. But if your repayment record is unblemished, you might get a loan against your credit card limit at 14% from the bank, where the EMI would be Rs 8,978, a saving of almost Rs 200 a month.

What’s more, these loans don’t require documentation and the money is in your bank account within 2-3 days. You can use such loans to consolidate and pay off high-cost debt on other credit cards.

The downside is that your credit limit comes down if you take a loan against it. More importantly, it is easy to fall into a debt trap if you blow away the easy cash on non-essential expenditure. So, go for a loan only if you really need the money and when you have exhausted other options.

Potential Gain: Rs 1 lakh loan for a year on your card will be cheaper by almost Rs 200 a month.You Save Rs 2,400 on your interest paid otherwise…!

Tomorrow we will see the Do’s and Don’ts of Credit Cards to summarize this topic.

Stay tuned and A-L-E-R-T…!