Loan Basics . Make smart use of your credit card

Amid salary cuts, job losses and disruption to income, many may resort to using their credit card to bridge the gap between income and expenses. Since credit cards can be one of the costliest forms of borrowing, they need to be used wisely, and ideally, not be used as a substitute to income.

Credit cards can be extremely beneficial as long as you make regular and timely bill payments.

Missing payments or even paying the minimum amount due can easily lead to a debt spiral. Here’s how one can manage the bills.

Converting dues into EMI

Though cards issuers have been given temporary relief in the form of moratorium, it increases the chances of piled-up debt as finance charges are still applicable.

So, instead of opting for moratorium, you can convert the dues into EMIs.

This way, you will find it easier to not only pay the bills but also save on the finance charges and some other penalties (if you pay off the EMIs on time).

Let us understand this with an example.

Ajay opts for credit card moratorium for three months — from June to August.

The total outstanding amount on his card is ₹60,000. If finance charges are applicable at 3.5 per cent per month, here is how his outstanding amount increases.

Outstanding as on June 1, 2020 = ₹60,000.

Outstanding as on July 1, 2020 = ₹60,000 + ₹2,100 (financecharges) + ₹378 (GST on finance charges) = ₹62,478

Outstanding as on August 1, 2020= ₹62, 478 + ₹2,168 + ₹390 = ₹65,036

Outstanding as on September 1, 2020 = ₹65,036 + ₹2,276 + ₹409 = ₹67,721

So, in this scenario, Ajay will have to pay ₹7,721 as interest and GST in addition to his original bill amount of ₹60,000, after the moratorium period ends.

However, if he converts this outstanding amount in EMIs for three months instead of opting for the moratorium, here is how he will benefit.

Firstly, the monthly payment burden will be reduced as he need not pay the entire sum at once.

Now, assuming the interest rate on EMI is 18 per cent per annum (1.5 per cent pm), Ajay will have to pay only ₹2,133 as interest including GST. This is a significant saving for him, compared with the finance charges of ₹7,721 under the moratorium option.

An important point to note here is that you may not be able to convert the entire outstanding amount into EMIs.

Some transactions such as other active EMIs, interest, penalties and processing fee are usually not eligible for conversion.

EMIs on fresh purchases

EMIs are very helpful to spread the cost of big-ticket purchases over several months. In uncertain times like these, it is wise to stay conservative with your cash outflow. Credit cards allow you to convert your fresh purchases into EMIs so that the burden of credit card bills does not overwhelm your cash flows. Online shopping portals also offer the no-cost EMI option on select cards, which is even better as you will not have to pay interest on EMIs. Debit card EMIs are also quite popular nowadays.

Interest rates on credit card and debit card EMIs vary from bank to bank. It also varies on the basis of the tenure chosen.

For example, HDFC Bank charges interest at 16 per cent on debit card EMI for 12 months, while it charges 15 per cent for the same tenure when you choose credit card EMI. Axis Bank charges 14 per cent for 12 months for both credit and debit card EMIs.

However, for three- and six-month tenures, it charges a 1 per cent higher interest rate in case of debit card EMI.

Loan on credit card

Banks and NBFCs offer loan against credit cards to select customers. It can be useful to consolidate multiple credit card debts by paying them off all at once. This way, you will avoid hefty finance charges applicable on your cards. Also, it will be easier to manage a single loan payment instead of multiple debts. Interest rate on loan against credit card ranges 12-29 per cent pa.

This varies from bank to bank and may also vary from one user to another based on the bank’s internal policies.

However, you should note that loan against credit card is usually costlier than a personal loan and suited for smaller borrowings. If you wish to borrow a large sum for a longer tenure, personal loan could be a better alternative. For the next few months, it may be challenging to get loans, as most banks and large lenders are likely to be conservative with the new loans issued. In this situation, loan against credit card may prove to be useful.

Also, loans against credit card provides almost instant access to credit as funds are disbursed typically in a few hours. But do note that loan against credit card is not available to all credit card users, as it depends on the past usage and repayment behaviour of the customer.

Cash-back and discount

Some credit cards offer discount on purchases made with select merchants or with online shopping portals; others give you back in the form of rewards and cash-back. If you are able to make considerable savings on a particular purchase using credit card, it would be a good idea to do so.

Again, make sure that you pay the bills on time; otherwise, the penalties could exceed the benefit.

The writer is CEO and co-founder, Paisabazaar.com

COMMENT NOW