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Saturday, April 11, 2009

Best practices in Credit card usage

Credit cards were primarily meant to make people spend money even when they don’t have any. It was like taking loan and I believed borrowing is bad. So till two years into my first job I didn’t have any credit cards and used to avoid all credit card agents outside my office. But little later I realized few possible advantages of credit cards and couple of compulsions (not being able to rent self drive cars or make certain online transactions with debit cards) and applied for one. The Bank Rep was surprised that I still didn’t have any cards. Since then (past two years) I’ve been content with a total of 2 credit cards and using them judiciously without ever paying a single rupee in interest. In this post I’m listing few of my observations related to credit cards and best practices. My points are focused on how to make cautious use of credit cards and save money and NOT about how to spend over your limit and evade paying interest for a longer time. Hope you’ll find them useful.

1. Remember the great laws of shopping
Don’t spend because you’ve a card. Don’t get tempted by offers. Stay within your limits. Kishore Biyani has promptly admitted in his book, “
It Happened in India” that his single point agenda is to dig deeper and deeper into consumers’ wallet. Always remember:
-With a great offer you may save something when you buy (say 70%), but if you don’t buy, you’ll save it all (100%) (personally, I don’t want shopkeepers to suffer a huge loss selling me items at such a discount, so I don’t buy unnecessarily)
-Shops may be running never before, never again offers, but trust me, shops won’t close down after the sale. Same item can be purchased at similar rates in future also as the shop continues to operate and discounts will be under some other pretext. (just check out how many days in a year are “Cheapest Day” s for Big Bazaar)
Related reading:
Cautions to be excersised while shopping at supermarkets
2. Understand the billing cycle
Banks offer 45-50 days free period before due date and if used carefully, this can be used to earn one or two months of SB interest on your money. A billing cycle around 20th of last month to 19th of this month with next month 10th as due date can be used to save 2 months SB interest while other cycles say 6th of last month to 5th of this month with this month 25th as due date can be used to save max one month’s SB interest. Savings Bank interests are calculated based on the minimum balance found in your account between 10th and 31st of each month. So if you can avoid withdrawing money during last week of a month and maintain a higher balance till 1st of next month, do that. The amount of interest earned could be small, still money is money (for 10000 Rs, per month SB interest could be about 30 Rs). Avoid big ticket purchases on last few days of billing cycle.
3. Understand how various charges apply
All that glitters is not gold and the same is true with credit cards. Understand that banks will have innovative ways to charge you. Some examples:
-You’ve defaulted on payment and you expect bank to charge interest starting from 51st day (after 50 free days), but banks can charge it from the date of transaction
-You’ve paid 80% of the dues and expect the bank to charge interest only for the remaining 20%-but banks can charge for entire amount
-Of the 10k bill you received, say you’ve a dispute for 2k (say duplicate billing etc). You pay 8k expecting the bank to adjust it against the undisputed amount, but bank can adjust it the way it wants, probably showing as if you defaulted on a legitimate purchase.
-The balance transfer rate of 0.3% looks exciting? Beware, it could be on a per day basis than per month.
-The salesman told its lifetime free, but Bank’s definition of ‘lifetime’ could be “initial 3 years only”
-The ‘interest free’ EMI comes with a processing fee which if calculated can amount to a reasonable value (A Rs 250 processing fee for Rs 5000 purchase is as good as paying 5%)

If you’re alert and retaliate immediately some of the above charges can be reversed, else you’ll pay more than what you need to. Bottom-line: don’t assume anything. Cross check with bank via internal messages and save a print screen of these messages (banks websites may delete old messages). Similarly, soon after you get your card, communicate with bank (via their website) and get mail acknowledgement from bank that whatever promises the DSA (Direct Selling Agent) made are valid.

These days banks are facing difficult times due to various factors (no takers for new loans, those who borrowed are defaulting, poor recovery rates and increasing Operational expenses). One easy way to earn some revenue is to charge a small fee for various services which were hitherto free. So keep a watch to understand what is free and what is not. If you haven’t opened account at a nationalized bank yet, do it now. These public sector banks have improved a lot in terms of service and technology and are cheaper to deal with.
4. Avoid ECS
While opting for ECS has its convenience, I strongly recommend not to go for ECS and pay manually. With ECS we tend to get lazy and negligent towards our statements and may miss to notice excess charges/faulty billing. Also we’ll lose few hundred rupees unnecessarily if on the date of ECS debit there isn’t enough balance in the account (both bank and Credit card co charge penalty). Though it’s a bit inconvenient, pay manually after verifying the statement each month.
5. Be cautious on deals promoted by/in tie-up with credit card Cos
You’ll receive offers from insurance company the bank has tied up with or some deals from an online shop selling consumer durables- My suggestion is avoid buying from them. If you need insurance buy it from a trusted neighborhood insurance agent and not from the call centre, whose interest is limited to closing the deal and charging the amount to your credit card. (you may have to run from pillar to post later in case of any issues). Similarly the deals on consumer durables or other such offers also need due diligence. MRP and savings are overstated and a shop next street might give you similar or better deal. Even if it is 5% expensive it’s better to buy in person from a real shop.

Similarly evaluate real worth of co-branded cards/tie-ups. For example, say you get some extra benefit if you refuel at a particular fuel station, say HPCL. But if you’ve to drive 3kms extra to reach an HPCL outlet, one needs to check if the points are worth the extra fuel spent in reaching the outlet. A hotel room is available at throw away price at a far away destination-but are you sure you wish to spend 10times room rent on travel and other expenses?
6. Do online transactions during early morning hours
Avoid performing online purchases through credit cards during peak hours. Internet connectivity will be low and website also will be slow due to high user activity. There could be issues of connection breaking in the middle of a transaction and user meeting a situation wherein money is charged, but confirmation is not obtained on screen or having to perform entire transaction again. Do online transactions during non-peak hours, from a secure and speedy connection to avoid unnecessary troubles. Transaction integrity is still not reliable enough.
7. Miscellaneous
-Do not withdraw cash using Credit card from ATMs and do not opt for unsolicited offers like pre-approved loans.
-If you have multiple cards, keep one card aside and do not use it for few months- Bank will come back to you to check why you’re not using it and may offer some sweeteners like little extra reward points or some cash back to tempt you start using again. (warning-some banks will disable cards which are inactive for long time)
-At restaurants, don't let your card go out of your site. Better go in person and make payment.
-Have required info (card details/call centre info) handy so that you can you can block the card within minutes, if you realize that its been lost.
-Instead of waiting till the arrival of statement, proactively check your account couple of times a month, so that irregularities, if any can be noticed
-if paying by cheque, drop the cheque minimum of 3-4 days prior to due date and ensure that money is debited before due date.
-Avoid giving cc details to call centre guys to facilitate a purchase. Just not safe.
-Some companies insist on photocopy of credit card (like some airlines)- Be sure to darken sensitive info like CVV

Also read: How Banks can make credit cards safer

13 comments :

binnyva said...

One very important law in Finance: Don't spend money you don't have.

So when it comes to credit card - throw away your credit card - get a debit card instead.

Hari said...

I prefer cash all the time, but of course, due to online transactions, credit cards have become inevitable as most online vendors only have Credit Card option and even some internet payment gateways like Paypal allow debit cards only for US banks.

So it's better to have a credit card for backup purposes, but not use it at all (or use it just for trivial amounts to keep the card functional).

Radhika Ganesan said...

It has been my policy since day one of my personal credit card. I spend only when i have enough money in my account to repay in 2-3 days or if my salary is going to be credited within 7 days. Otherwise i resist whatever temptation i have for shopping! I do not treat my CC as surplus cash but just a way to avoid withdrawing lot of money and carrying it everywhere!

Shrinidhi Hande said...

Binny,

Agree on the law, but some transactions just can't be made without credit card (we'll either have to rely on a friend who has cc or depend on offline modes of payment), so having one card helps.

Hari,
Agreed, thanks

Radhika,
Ok. I feel we can be little more liberal-no need to rush payment within 2-3 days, just ensure that you pay before due date.

One major usage of cc for me is that I need it to take self drive rentals- without cc I can't rent a car. Also its easy let them block the security deposit amount on my card than pay deposit in cash.

Sumesh said...

While on the topic of banks,i am facing a situation,where in bank charges for not maintaining min balance in a new gen bank has almost touched 50000/=.That too my wife's account which she opened due to peer pressure when in college just for the sake of it.Now we have joint accounts and find no reason to pay the charges for that account which was never used except to pull out leaving some 2000Rs[which i feel is the mistake ,should have made it ZERO bal]
Had spoken to their call centres and some insiders in the branch in my city,they just candidly asked me to ignore it.
But when the prompt reminders from their HO reaches my inlaws they get jittery and keep sending the letters to increase my anciety level.Now for not maintaining or not using my accounts in nationalised banks i have never paid any fines,and to my knowlegde i had 2 such accounts,which i think should be there even now if i care to go and check.
But this new gen banks i guess are never tired of such pranks.

Shrinidhi Hande said...

Sumesh,

Agree. I thought of opening an account with HDFC- they wanted AQB of 5000k, with only ATM Card free (Debit card would cost Rs 100). I asked them- SBI gives me ATM card and all facilities for an AQB of Rs 1000, why should I keep Rs 5k in HDFC- the bank staff had no answer.

Anyway after few days I got a call that now their AQB is 10000 and I should give cheque for another 5000. I didn't see any point in keeping 10k in their bank for a paltry interest (ideally they should pay fixed deposit interest rate for that amount) and I asked them not to process my account opening request.

Ruchi said...

Understanding billing cycle is very very important, i had already been a victim of not properly understanding the billing cycle, i have to pay a good amount to credit card. I think it should not be used. One can try with HDFC Netsafe CARD Instead, it is a virtual credit card, now i am using it from last 3 years.

Shrinidhi Hande said...

I've heard of virtual cards, but not used them. can we use them for physical transaction also? or only online?

Ruchi said...

Shrinidhi the only disadvantage is that we can only use it for online transactions which are the most risky kind of transactions,i am using it from last 3 years and found no problems.

Shrinidhi Hande said...

ok.. Thanks for coming back and answering. I don't see much of an usage if we can't use it offline. What percentage of purchases we do online? If you ask me, very minimal.

Marion said...
This comment has been removed by a blog administrator.
Anonymous said...

Can anybody give more information on the billing cycles of Credit Cards?
please give detailed information with clear examples.
Thank you.

Shrinidhi Hande said...

Pls check with your bank or net for the same.
I would have given detailed reply, but of late too many anonymous comments.