'Credit card debt comes with high interest cost and stringent penalties.'
'If you do not repay on time, the costs balloon.'
According to the Axis Securities Credit Cards and Digital Payments Business Monitor Report, there has been a marked shift towards credit card usage compared to debit cards.
In August 2024, credit card spends were 3.9 times higher than debit card spends, up from 2.8 times in August 2023.
While credit cards have become the preferred payment option for many, this has also raised concerns about overleverage, particularly during the festive season.
Banks are partnering with major e-commerce platforms and offering discounts and equated monthly instalment (EMI) options on credit card purchases to entice customers.
E-commerce platforms are offering irresistible deals. This may encourage overspending.
It seems like a win-win for everyone.
"Buyers get deals at lower costs. E-commerce companies get to boost their sales, and credit card companies benefit as customers revolve their credit at high interest," says Abhishek Kumar, Sebi-registered investment advisor and founder, SahajMoney.com.
Experts caution against overleveraging.
"Credit card debt comes with high interest cost and stringent penalties. If you do not repay on time, the costs balloon," says Adhil Shetty, CEO, BankBazaar.
Individuals can quickly slip into a debt trap.
Avoid withdrawal from ATMs
Credit card withdrawals from ATMs incur significant fees.
"A transaction charge, which is a percentage of the withdrawn amount, applies immediately," warns Shetty.
"Never do this as interest is charged per day," adds Mohit Gang, co-founder and CEO, Moneyfront.
Interest rates on such withdrawals can range from 24 to 46 per cent annually.
Compounding interest trap
Credit card bills usually offer two payment options: the total amount due and the minimum payable; the latter is around 5 per cent of the total.
While paying the minimum might seem convenient, it can quickly lead to a debt pile-up.
"The unpaid balance attracts a monthly interest of 2 to 4 per cent," says Shetty.
A late payment leads to a penalty, which according to Gang, can go up to 30 per cent. Add the 18 per cent GST on both interest and penalties and the burden becomes heavy.
To avoid these pitfalls, experts advise paying off the full balance within the interest-free period.
Gang notes that failing to pay even the minimum amount results in a default, which harms your credit score.
Avoid festive overspending
The festive season often encourages impulsive purchases, especially after receiving a Diwali bonus.
"Allocate part of it to savings or investments, rather than spending it all," says Gang.
Kumar suggests preparing a list of necessary purchases and sticking to it, while Gang advises comparing prices across platforms to ensure the best deals.
Credit cards come with various benefits and rewards (see box).
"Big-ticket electronic product manufacturers have tie-ups with card companies. Check which card offers the best discounts and cashbacks," says Shetty.
Managing credit card debt
Kumar recommends that credit card EMIs should not exceed 30 per cent of your post-tax income.
To reduce existing debt, he advises using liquid savings to clear high-interest credit card balances. If that is not feasible, cut discretionary spending.
Alternatively, consider paying off credit card dues with a personal loan or an overdraft facility, both of which usually carry a lower interest rate.
Source: Moneyfront
Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
Feature Presentation: Ashish Narsale/Rediff.com
