Credit Card Fantacy

You might be getting frequent unsolicited calls from the Bank (or their agency) to avail of the credit card. They usually offer 30 - 45 days of interest-free spending. Even if you have one, they insist to take another or transfer your existing outstanding to the new one with EMI options. 

Credit cards work on the principle of 'spend today and pay later' and if you pay entire dues within the prescribed date without fail, you get another credit-free days.  

You may be wondering Bank generally pay interest of 2.5% - 4% p.a. in a savings account and around 5%-7% in FD. However, if you don't maintain a monthly average balance or default in cheques, they levy a huge penalty. If you take a personal loan, the interest charged is very high. Then all of sudden how they are so generous to you to provide you interest-free services through credit cards! With credit cards, Banks earn huge profits in form of penalties & interest. 

We must understand the following points:

• There is no 'free lunch'. All things in life which come to us as 'free' cost us indirectly.
• If you default in payment or pay a partial amount then monthly interest is being charged as 3.5% appx., which comes out to be 42% p.a. (APR)
• Now, people by nature, are not very disciplined with respect to their finances. People even forget to pay their electricity bill, insurance premium,  or other utility bills in time and always bear a penalty of late payment. 
• Banks know that around 70% of people are going to default on their payments and where Banks can charge you late payment fees, interest on the borrowing goods, surcharge & tax.
• The point is that if anyone is not disciplined in their life, should not get into the marketing gimmick of the credit-free offer. That will cost you huge later. And discipline means military discipline in your finance - strict control over your habits.
• People also overspend through credit cards in comparison with when they pay through cash. This is human psychology, when you pay in cash, taking your wallet out from your pocket, you get concerned/aware about your spending. However, when you swipe a credit card, you don't feel any concern/pinch as it required to be paid later even if you don't have cash in the bank right now.
• Making the part payment is not a default, however, it attracts huge interest. When you skip the payment or delay the entire payment then it falls under the default category and downgrades your CIBIL score, which affects your creditability & future borrowing in form of a loan from any financial institution.
•  A credit card works as a double edge sword. You become more lenient w.r.t expenses due to easy availability of money and on other hand, if default, you end up with paying huge penalty & interest payment. 
• Many people get into the trap of rolling interest month by month and find themself very difficult to get out of it. Your entire savings & investments can be wiped out in a short period of time.

If you are the kind of person who is financially very disciplined, you can make use of a credit card in your favor, however, if you lack such control, better to avoid using a credit card and go with a debit card instead.