In the last decade, credit card usage has become rampant in India. The burgeoning middle class is willing to splurge on the latest mobile or television as soon as it hits the market. Something, your grand father or mother would never have advised you a decade back.

Youth, besides being spenders themselves, have the biggest influence on the consumer durables being purchased in the family. Like a father recently confessed, “When I purchase the next mobile, the choice will be made by my son because… he knows that he will be the recipient of my old mobile.

Obviously, he wants me to purchase the latest and the best.” And we are talking about a conservative son here who is willing to take the second hand mobile and not someone who tells his father that he wants the latest for himself.

Also, with credit card companies giving add on cards, spending through a card for the youth starts at a very young age. But while all this is great, parents and youngsters are still ‘not that educated’ about how to use this card effectively so that they do not over spend.

So for starters let us look at the basic fee structure of credit cards. Today, many of them come with no annual fee for the first year, except for some co-branded cards like Gold and Diners Cards, which may be available at an annual fee of between Rs 750 or Rs 2,000.

Most banks charge an annual fee from the second year onwards while a few others are lifetime free cards. Besides that, all the other costs, including interest, are usually dependent on the customer’s card usage.

In most credit cards, interest rates are 2.95 to 2.99 per cent per month approximately, that translates into about 41 per cent per annum after taking into account the service tax. Some banks charge slightly at 34 per cent per year. And of course there are a whole list of other costs like late payment charges, over limit charges, roll over charges, tax on rollover etc, that can completely confuse you.

So here are a few ‘do nots’ while using your credit cards:

Never use them to meet long-term expenses – For instance, you should not purchase an automobile/vehicle even if you card allows it. You should do so only if you have that kind of money in your savings account or through an auto/vehicle loan.

The first option is best but the second option is definitely cheaper than the payout on a card.

Wise use

Never use it to cover short fall in income—Customers also use credit cards to meet the continuous shortfall in their income. Suppose your salary is Rs 20,000 and your expenses are Rs 30,000, you are living beyond your means.

You should not use credit cards to meet these expenses; a credit card is not designed for shortfall of funds. “If a customer does this, he is getting into a debt trap”, warns Dheeraj Dikshit, Senior Vice-President, cards and personal loans, HSBC India.

Withdraw cash as little as possible—borrowing on your card is not the smartest thing to do as there is a higher cost attached with it. Suppose you are travelling and need emergency funds, you can withdraw cash up to 40 per cent of your credit limit in cash.

If your credit limit is Rs 15,000, you can withdraw Rs 6,000 where you start paying the interest from the time you start taking the funds. Hence the best way out is that you refund the amount as soon as you reach home.

Loan on phone

Over the years, credit card companies have also got smarter and now offer varied services like converting high value (i.e. above between Rs 2500 - 5,000) purchases to EMI-based products such as ‘Loan on phone.’

Here the customer can repay his high value purchase or, in the case of some banks, even his outstanding balance, by converting it to a ‘loan on phone’ or personal loan, where the interest rates are 50 per cent lower, at 18 to 21 per cent per annum, against regular credit card rates, which are 41 per cent per annum.

He gets the benefit of repayment of the principal in fixed tranches over a longer period of normally 12 months in the case of ‘loan on phone’ and more in case of a personal loan. 

So how do you get out of a debt trap if you are over exposed on your credit card?

Says Dheeraj Dikshit, “We recommend that long-term funding needs be managed through relatively lower interest rate and longer duration products such as personal loans where the average rate of interest and duration is 18 per cent and four years respectively.

While this will enable the customer to meet an urgent requirement or commitment that is in excess of his/her current cash flows, it will also ensure that debt servicing does not constitute a large component of his income and thereby impair repayment ability.”

Financial consultant S Ravi Kumar advises that the best way for a customer to get out of a huge outstanding balance is to take a loan against his fixed deposits in a bank or against his LIC policy, or provident fund.

The interest rates on these would be much cheaper and on a reducing balance. He can, with that loan pay off his credit card outstanding, which would otherwise prove to be very costly.

In short, credit card is an asset to have as it helps you to make important purchases, meet emergency expenditures and make payments in a phased fashion. However, it entirely depends on you whether you make it a liability by over exposing yourself.