Guide to smart banking. Guide to smart banking: Pick a card – any card – but use it smart!

In a world that’s giving itself over to the unalloyed celebration of purchasing power, and is increasingly migrating towards digital transactions, your credit card, which connects those two vibrant trends, can be a true friend. Credit cards have been around for a while in India now. The first credit card was introduced by Andhra Bank in 1981, and in the years since then — and particularly after the reforms of 1991 opened up the economy — the base of credit card users has climbed steadily. In recent times, there was a slowdown in credit card use for a couple of years after the global financial crisis of 2008. But since the economic recovery, card use is back in full force: with technology-savvy youngsters swiping uninhibitedly away, card-based transactions are on the rise.

According to data from the Reserve Bank of India, the number of credit cards issued by all scheduled commercial banks in the country increased to 29.8 million in the year ended March 2017, against 24.5 million in the year-ago period. Of the total credit cards in issuance, private sector banks have the lion’s share, with 18.6 million credit cards, followed by public sector banks and foreign banks with 6.1 million and 5.1 million cards, respectively.

Pluses, minuses

Credit cards do come with several advantages: they help even out liquidity and cash-flows and offer other benefits, including rewards points, which can either be monetised or traded in for discounts or freebies. Banks offer a dizzying range of credit cards to cater to different income groups with diverse lifestyle, tastes and preferences. There are different kinds of co-branded credit cards, which offer deals that match your spending preferences.

However, it’s easy to get carried away and go binging with your credit card. It, therefore, becomes critical to know how a credit card works, and how you can make optimal use of it without piling on prohibitively expensive debt.

Cards are generally issued in affiliation to VISA and Mastercard, which are the global leaders, and RuPay, which was launched in India by the National Payments Corporation of India.

Although banks’ criteria for issuing credit cards to customers vary, they typically issue cards only to those with a minimum proven income of about ₹1.50 lakh a year.

In recent times, with the advent of credit bureaus and widespread use of their credit scoring mechanism, a healthy credit score of above 750 is also seen as a threshold for issuing credit cards.

Even those who do not have a valid proof of the minimum annual income or the desired credit score from TransUnion CIBIL or from any other credit bureau may qualify for credit cards with some banks against lien on deposits.

The billing statement

Every month, the card issuer sends out a billing statement, which offers a summary of the transactions made on your card for the previous month — and details of the transactions.

It is worth reading the statement closely. It lists out the total outstanding amount against the card, the deadline for the payment, the total credit limit and the available cash limit among others.

Every card billing statement additionally lists out a minimum amount due, which is typically 5 per cent of the total amount outstanding. This is an important detail. Pay the minimum amount due before the due date in order to avoid a default and higher interest charges/penalties.

Interest-free credit

Understanding the credit cycles and the interest charges is important not only for you to leverage the advantages that derive from card usage but also to avoid defaults or higher interest. In an advisory on credit card usage, ICICI Bank says: “If you make a payment for the Total Amount Due before the Payment Due Date, no interest charges are applicable. Thus you can enjoy interest-free credit from the date of purchase to the date on which the payment is due.”

The interest-free credit period may range from 18 to 48 days, depending on the date of the transaction and the payment due date.

But even if you have paid the minimum amount due (but not the entire amount outstanding), interest will be charged on the total amount due and on all new transactions till such time as the previous outstanding amounts are paid in full.

Also, do note that interest will be levied on all cash advances from the date of the transaction until the date of settlement.

Any installment amount due on the card will be added to the minimum amount due. “If there is unpaid Minimum Amount Due of the previous statements, these will be added to the Minimum Amount Due of the current statement,’’ the ICICI Bank advisory says. That is pretty much the standard operating procedure across card issuers.

If the total amount outstanding is more than the credit/cash limit, the amount by which the credit/cash limit has been exceeded will also be included in the Minimum Amount Due.

Use with care

Credit cards offer benefits, and as long you use them in a disciplined manner, they extend a useful credit line. But in the event of cash withdrawals or technical defaults, the costs pile up exponentially. Being an unsecured loan product, banks charge high interest rates — in the range of 20-30 per cent. And it doesn’t help that the user typically may not even know of the hidden charges that are kicking in.

And when that happens, the credit card — which you once considered a friend — may turn into your worst enemy for the dire financial costs it inflicts on you.

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