A friend, Jayesh, recently sent me a notice received by him from his credit card issuing bank (a foreign one) titled “Illustration of change in interest calculation methodology.” He feared it was yet another way to gouge more money out of him. I studied the notice. As I suspected, for those who had not paid 100 per cent of the amount due, it would now calculate interest not just till the statement date but up to the payment date. To be able to pay off the full amount, the client had to calculate the interest between the statement date and payment date himself and pay it off on his own.
I will not be surprised if, like Jayesh, you did not understand what my clarification means. Suffice to say that even earlier, it never made sense to pay anything less than 100 per cent of the amount due. Now it is even more so, that’s all.
This brings me to the point of credit card usage. These cards can justifiably lay claim to a significant role in spoiling the thrifty culture of Americans. Yes, a couple of generations earlier, Americans lived within their means. Fortunately, in India, we have yet to see the frantic excess spending fuelled by readily available credit. This is partly due to our credit-averse middle class and partly because the collection of credit receivables is difficult in India.
Have you ever wondered why shopkeepers accept credit cards even though they must pay a discounting rate of around 2 per cent? For every Rs 100 worth of purchases made by you using a credit card, the shopkeeper receives only Rs 98, and that too after a few days. Partly it is because of competitive pressure. But the biggest reason is that it is a proven fact that those who pay by using credit cards shop for higher amounts and go in for impulse purchases. So, what the shopkeeper loses on the original purchase, he more than makes up in the additional or upgraded purchases that the credit card ensures.
A credit card does have some virtues. It can be beneficial in an emergency. If you need to make last-minute travel arrangements, a credit card is indispensable. I have known clients to use their excellent credit scores to get a credit card issued with significant credit limits. They use it for reimbursable business expenditure where the chances of making impulse purchases are lower. This card also serves as a free-of-cost contingency fund. In case of a job loss, you can use the credit limit to pay for necessary expenses (you are unlikely to make impulse purchases then). At that time, even if you are able to pay back less than 100 per cent of the amount due on the credit card, the temporary high-interest cost is justified because of the savings you have made by not having to park your surplus funds in low-return liquid funds for the contingency.
All that you need to reap the benefits of a credit card is to ensure that you do not end up spending extra just because you are using a credit card to pay for something.
The writer is a Sebi-registered investment advisor