Amit and Babloo, fast friends, frequently discuss managing their personal finances. Recently, Babloo, a marketing professional, frantically kept calling Amit, a financial writer, to seek guidance on ways to deal with his personal finances during these days of Covid-19-led lockdown. What follows is a fictitious account of their discussion.

Babloo: I really need your help figuring out my credit card bills.

Amit: What happened? Didn’t I tell you that you should always try to pay the full amount of the credit card bill by the due date?

Babloo: I know. But I have been paying the minimum amount due for the past couple of months to conserve cash.

Amit: That’s not a very bright move.

Babloo: I know, I should ideally pay the full amount. But we are living in uncertain times, Amit. I have to conserve cash. The credit card company allows me to pay a minimum amount to get by, without labelling me a defaulter.

Amit: You may not be a defaulter, but then, the credit card company extracts a load of money from you by way of high interest, that can even go up to 40 per cent per annum.

Babloo: I understand. There is another reason I called you – something that’s left me puzzled.

Amit: Tell me.

Babloo: The statements for all my three credit cards that I got for this month have no mention of the minimum amount due. What does that mean? Have they waived off the minimum payment?

Amit: No, not at all. No credit card company waives off anything. It only means that you are eligible to opt for the moratorium scheme for loans that RBI has allowed banks to offer to their customers.

Babloo: So, I don’t need to pay anything on all my three credit cards, right?

Amit: Well, technically, yes.

Babloo: That is really good.

Amit: Wait, wait! I have not finished yet.

Babloo: But they do not want me to pay even the minimum amount, Amit. Why should I pay? I can conserve cash by not paying anything.

Amit: Babloo, listen. It does not work like that. I’ll explain it once more. Do you have enough money to pay all your credit card bills? Are you running short of cash?

Babloo: No, I am comfortably placed. I can take care of all my mutual fund SIPs. I have enough money saved in my emergency fund in short-term deposits. I also have some extra money that I have kept just to invest in the future.

Amit: Then why don’t you want to pay your credit card bills?

Babloo: Because there is no mention about the minimum amount.

Amit: It’s an option, Babloo. It’s not that you are compelled not to pay.

Babloo: Ok, but I have been choosing to pay the minimum amount since the March 2020 statement, just to conserve cash

Amit: Babloo, you have already conserved enough cash and by your own admission, are comfortably placed. If you do not pay your full bill amount, you will have to pay 40 per cent interest per annum on those unpaid dues. Paying just the minimum amount is not an optimal way to use a credit card. This facility should be used only in real emergencies when you are really cash-crunched. Also, the moratorium on loans option that lets you get by even without paying the minimum amount due is something to be used only if you are in real financial trouble. In the moratorium option, the payment is only delayed, not waived off. And you will have to pay interest at exorbitant rates as mentioned above on the delayed payment. Remember, credit card debt is among the costliest in the market, and can land you in a debt trap if it goes out of control.

Babloo: What should I do now?

Amit: Simple, pay off your entire credit card outstanding including your March dues.

Babloo: One more thing, Amit. The credit card companies are offering me EMIs on purchases that I made through the cards. Should I take it?

Amit: If you can pay the full bill, it’s not a good idea to convert any of the transactions into EMIs. Remember, there is no such thing as a free lunch. You will, in most cases, have to pay interest on the EMIs or may lose out on benefits such as discount. The interest rates on EMIs may be lower than the usual 40 per cent or so, but it is still a cost. Also, if you default on your EMIs, you will have to pay interest on the unpaid EMI and accumulated interest at the usual higher rates.

Babloo: You just scared me. So, does everyone who pays only the minimum amount pay interest at that exorbitant rate of 40 per cent?

Amit: It depends on the credit card company. Rates can be lower, but in most cases it is above 30 per cent. It can go up to 40 per cent or even more. In normal times, when moratorium is not available, not paying the minimum amount will also mean a defaulter tag and late payment charges along with interest dues. In some cases, the late payment charges increase progressively as the unpaid credit card bill amount increases. And if one doesn’t pay the late payment charge, interest will be charged on that too.

Babloo: You mean to say that you have never paid just the minimum amount?

Amit: Of course not. I always pay the full amount. That is the whole point of having a credit card, Babloo. You should use the credit period wisely, make good use of the interest-free credit period, but pay your full bill amount on time before the due date.

Babloo: Nice. One more thing, Amit. Now that we have to maintain social distancing, all my points are useless. I cannot use it to book airline tickets or for hotel bookings. There are some other benefits also I cannot use the accumulated points for. What do I do with my points?

Amit: I think, you should check if you can convert the points into cash or use the points against any the payments you have to make.

Babloo: I remember receiving some text messages that asked me to convert the points against some of my spends. I will check that.

Amit: You can also find the information on the website of your credit card company or maybe even on your credit card bill statement.

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