Credit Card debt trap!

Credit Card is a convenient means of shopping . What is often forgotten is that Credit Card Cos aren’t in the business for charity or public service but to make maximum profits from customers.

Credit card debt is an example of unsecured consumer debt, similar to a personal loan that accrues over time when U the customer Charges things on the Credit Card but fails to pay it back in time.

As economies get more complex card money is preferred over paper money and statistics shows Credit card debt is said to be higher in industrialized countries.

A fast developing India is no stranger to this phenomenon and CC debt is fast growing. Despite a cultural resistance to casual credit, the industry is growing at a rate of 30% every year.

PRECAUTIONS

Though the market is regulated by the RBI, the CC companies are still kings . They will want a customer to be in debt but not delinquent and once ur in debt expect charges fines and very high interest rates on it.

When you apply for a credit card, read the FINE PRINT, find out what is the JOINING and RENEWAL fee . Then ask for the interest rates on ‘revolving’ credit and what are the charges and fines for late payment and other things. This is calculated as an Annual Percentage Rate (APR), divided by 365, for a daily calculation, or 12, for a monthly figure. This, in most cases, is between 34 – 42%. Indian credit card companies write off one in ten loans as bad debt no wonder the rates are so high.

Remember poor credit history tarnishes your creditworthiness and it can becomes difficult for you to get a Home or a Personal loan at favorable rates. Most Banks and CC Cos report defaulters to Credit Bureaus such as The Credit Information Bureau (India) Limited or CIBIL, and worse as Personal Credit rating is still a new concept, it is a lot more difficult to even get ur name off their roster even if it has been done by errant bankers.

Are You in a DEBT TRAP ?
  • Do you have a large outstanding balance ?
  • Do you always pay the minimum due on your credit cards each month ?
  • Have you upped ur card limit because u have reached your limit or maxed it out ?
  • Do you use one credit card to pay off the bills on another card ?
If answer to one or more of the above is YES , if you don’t act soon, you are headed for big trouble and your dues, interest and late payment fees are already costing you a fortune – remember – this is a vicious cycle – its time to Wake up! You are in the Credit Card Debt trap! .
You just don’t know how it happened. Without realising it your credit card has been swiped too many times. The basic instinct of a CC Debtor is the avoidance and postponement.
Accepting Mistakes and Making Amends

For a debtor the first step to independence is acceptance that you are in deep financial shit and you need help and this is the most difficult thing. It is even more difficult to discuss this with people.

A very telling survey has found that the last thing people want to talk about is their credit card debt.

Eighty percent of the respondents said that they were somewhat or highly unlikely to talk about the amount of credit card debt with someone they just met. Details of your love life were a close second with 78 percent of respondents saying they were somewhat or highly unlikely to broach the subject, with salary details right behind at 77 percent. Other unmentionables: monthly mortgage or rent payments (69 percent).

If you’re in trouble, tell someone about your debt. Tell a person you love and you trust and you are comfortable with about the financial mess. It could be your parent/s, your 3month old child, your best friend. Make a start. Talk about it, not just how much you owe, but to who and why. Try talking to one person. This week. Believe me, It will lighten your load! Keeping it taboo keeps you from getting the help you need. Best thing is to talk to Responsible people, who know a few things about finance, people who you trust, and take advise from.

Getting Organised

Make or get your personal balance sheet and cash flow sheet made and analyse your spending for the last 2 yrs. Get all your credit card bills together. For each account, write down the total balance and the minimum monthly payment required.

  • Be sure you make the minimum payments on your credit cards until you have a financial plan in place. Look at your spending habits and make cuts where you can to find the money to pay your credit card bills.
  • Maintain payment records religiously as they are proof in case u will have to fight it out.
  • Make payments at onsite bins not ofsite bins because sometimes companies delay the clearing cheques to charge you late payment charges.
  • Stop or reducing using ur credit card/s. Give the card to a trusted relative to be kept under lock and key because – Hey the spending habit needs to be killed !
  • If need be, use all your savings to bring your outstandings to zero. Remember savings earn you at the most 9% annually while savings bank account gives you 3.5% . At 34% the annual interest payment (w/o other charges) on a 1,00,000 cc debt is Rs 34000 or Rs 2833 a month.
  • If your debt is above 50000 or above try taking loans from friends or personal loans from banks to repay credit card debt. Personal loan rates are at 16% Else consider transferring your balance to a low-interest card for the time being.
  • Pay off cards which charge you the highest interest rates etc first and if that is not possible prioritise CC payments over any other debt. Don’t put off settling your dues for another day. The more you delay, the more the bills will mount.
Change your spending habits, avoid having more than one credit card and never exceed the limit. Lastly destroy all your excess credit cards when they are of no use to you, but make sure you intimate the issuer and take a written acknowledgment from them and file it properly, as it is very important and indemnifies you from further sudden liability they might want to impose.
Companies in India are very high handed and rightly so because they are in a high risk business and because our legal system is slow and archaic and they have an inhouse legal team of specialists to deal with you. Know your rights. Do not be scared to use your rights and complain of unfair treatment to the regulator and make sure u read the RBI guidelines.

This post is mainly inspired by a friend. Hope he reads it and is making amends.

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26 thoughts on “Credit Card debt trap!

  1. I totality agree that credit cards are a trap. As a collection manager I am in a unique position to see what credit card companies don’t want the consumer to know. I could write for days about the fee’s that are added to balances, default APR’s, posting payments late and so on. This is why credit cards are called revolving debt. It is designed to have no end; credit card companies lose money when you pay off your credit card balance.

    Even though credit cards are traps they are a means to an end; in order to qualify for credit you must have credit established. Most people do not have money to pay for a car or home out right so credit is needed and credit cards are one of the best tools to establishing credit. Use it wisely!

  2. If people who find it difficult to make ends meet use credit cards, they get into trouble. They will not be usually be able to pay the interest in time if they delay.

  3. Nita ,
    ur correct – worse it is not only the poor but a lot of rich folks that get trapped – people with incomes well above 2 lakh a yr, thanks to fancy lifestyles based on card spends

    thanks arvind and amy

  4. I didn’t use a credit card in India because I don’t agree to the whole philosophy of borrowing at a potential higher rate. But in Canada, I had to, because there is no other way to build up a credit history. Card companies hate me because I always pay on time 😀 I hope they don’t call this a ‘bad’ credit history!

    Very well written article. I would totally follow your advice if I were your that particular friend.

  5. Neither do i , but ur strategy is excellent!
    Marnica – bal transfer is a temporary thing – to save on the interest and fees and it is a dangerous game if u have a habit of maxing out cards !

  6. Ankur
    i was a bit amazed when i didnt see ur comments

    Ur very correct,
    VEry Very tough to change a persons mentality
    But hey he has at least gone thru part one of the equasion – realising that his financial habits are unsustainable and ruinous – lets see if he gets cracking at eliminating his debt

  7. so what do you think i should do to prevent my comments being marked as spam?
    its sometimes not feasible to write emails to each and every blog in which i am posting a comment.

    neways i am sure soon i would be getting rid of my blogging habits.. college life is a bit too hectic

  8. Suppose you want to start a small business, but you are not sure that it will be successful. If you have a family with young children it would be very risky to secure your property against the loan. In such a case unsecured loans may be safer for you and for your family. It is true that getting approval of unsecured loan is difficult. Even so, if you have spotless credit history, you should not hesitate to apply for unsecured loans. Generally unsecured loans are available for anyone with a stable income and decent credit history.

  9. Great post, Prax!
    I have a simple solution: just use cards to pay for things like cinema tickets or air tickets online. For anything else, only buy with cash. If you don’t have cash, don’t buy, or go for EMIs for large expenses like buying TVs, etc.

  10. Gee, this is an awesome post! Very well-researched, and quite informative! I’m gonna pass it on to a few unfortunate people I know… Thanks a ton, man! 😀

  11. Sorry to hear your friend is in this mess.. You have set him a good plan if, of course, he reads and follows it.

    Surely, the key problem in all this is the lack of basic financial literacy, which, like ethics, should be taught at a young age. I do not know any schools in India (or for that matter, in the UK) where these issues are discussed.

    That leaves parents to teach a person these skills. Not all parents are equipped to deal with these matters either.

    I am aware that wealth management firms run training workshops for the progeny of the rich but no such resources exist for the average person’s child.

    The alternative for many is to learn through these unfortunate experiences.

    Good post.

  12. Thanks folks for the amazing response.
    Shefaly ur one witty woman , u said it – Its lack of basic financial literacy.
    Many people in the 60s are financially illiterate and explicitly trust agents for their financial decisions.
    My other college friend who is a CA had zero savings when he started out in life, now he has changed and is saving at least 20% of his income.

    Thanks Nikhil- please do

    Rambodoc – Very good idea ! like Priyank ur a liability to the CC company .

  13. Although points mentioned in the post are noteworthy, it is still biased and one may get an impression that CC are bad.

    As a long time user of India issued CC both in India and Abroad, let me tell you the plus points.

    1. If you are settling your due amount every month without leaving any balance, you are doing fine. In my case I have standing instruction with the Bank and so no problem. People like me benefit at the cost of those who use revolving credit.

    2. Since I do lot of online shopping CC is a must. Ebay, Amazon etc offer very good deals if you want to save money.

    3. The rewards programme of CC is also very good and I have received many useful items free.

    4. I use my CC for online edition subscription which is great.

    5. Overall CC is great tool if you know how to use it.

  14. Prax:

    Thanks.

    On being a “..liability to the CC company “: I would disagree.

    Like all businesses, credit card issuing banks have a risk profile on each customer. They do not entirely dislike people like R-Doc, Priyank, LongTime CC user and me.

    We are the people who make part of these credit card issuers’ income projections promised to analysts possible!

    We are also the people who are easily able to obtain an extended credit limit for a limited time, if we need it, because the issuer knows that with us, their money is not at risk.

    Yes, we may be overly canny in the use of credit cards but at the end of the day, the banks know – the consumer is not a moron, the consumer is your wife (David Ogilvie I think).

  15. True, in the correct sense of things i absolutely agree with you Shefaly.

    Every customer is important so as to boost revenues and margins and cardholder numbers.
    But you arnt their most paying customers ur their dal roti customer while my friend is their biryani customer.

  16. I plan to start a surrender credit card campaign .serious persons may contact my mail id or phone tanx sundararaman

  17. I wish I was reading blogs like this a few years ago. I wouldnt be in the shit I am now, owing more than $1,200,000 to friends, family and banks. I would know all the right steps, I would get motivated and inspired…

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