July 12, 2007


How to use Credit cards in India

The high interest rates on credit cards (CC) in India has attracted the international attention. This NYT article repeats almost same thing which we have been reading in newspapers and watching on TV.

As per the article, the CC interest rates in India can be as high as 30 to 50%. For the developed countries, in US the average rates are 17-20%, and can go upto 30% depending on credit history. Average interest rate in UK is 17.5%. It must be noted that the inflation and risk-free interest rates in these countries are quite low. Compare it with Brazil which has average interest rate more than 200%(!), while the inflation is still in the single digit. The epitome is while the rates 30-50% seem high, which they actually are, they are not out of tune with rest of the world.

My take is rather than the interest rates, it is the lack of education which is causing the unrest among the card holders. And banks don't seem to make a whole-hearted effort at educating users because it is not in their interest, excuse the pun. So, with limited knowledge, here is a succinct course - "Using Credit Cards 101." (A personal friend owns some these ideas.)

  1. Use CC only when you have the money to pay back. Convenience of not carrying cash should be your prime motivation of using CC.
  2. Every year you should pay Rs 0 (Zero only) as the interest charges and fines on credit card.
    • 2a) Pay your card dues well before time. If you don't get your bill on the due date, contact them and ask for them to send.
    • 2b) Slightly overpay the dues. If you pay Rs 1 less than actual dues, the technology (and the bank) will point to the rulebook and levy charges. Beat them. Revolving credit is simply out of question.
  3. Never, I mean never, withdraw cash using credit card. The charges are prohibitively high. Read (1) again. In case of emergency, user another network of ATMs called "friends."
  4. Say no to all random tele-marketing offers (additional card, EMI card, insurance, co-branded cards) with the card.
  5. Keep the card information secret. Generally, banks own limited liability in case of misuse.
  6. Debit cards can also be used but as they are not accepted widely on internet. That makes CC necessary evil. Apart from that the fraudulent charges on credit card can be disputed, which is not the case with debit cards.
Feel free to add more easy-to-follow rules.

Culturally, our society has treated personal debt with shame and contempt. By looking at the incidents, may be the old wisdom is still relevant.

It would be sad if plastic money dies in its infancy due to inability of business and customers not coming to terms with each other. Plastic money will automatically widen the tax net bringing making more people accountable, who are otherwise running scot-free.

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Credit Cards are as you say a necessary evil. What most people forget is that it is a unsecured loan. Treat it as such and use it only to bunch and pay your bills a little later.

Then there is the "old & out-dated" wisdom : "Live within the means". Never use it to fulfill your wants, which are always much costlier than your needs.

But then, I may be the odd one out here...
India is not the only country were people are not educated about credit cards and any kind of debt is considered to be a shame. It is very much the same in Eastern Europe. It is mostly because of the long epoche of socialism, communism, etc that has affected not only the economy but the minds also.
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