Posts Tagged ‘credit card’

Reduce your credit card debt

Credit cards are very convenient and have become a everyday part of our lives. Often we lose control of our spending as it is too easy to make a minimum payment and roll over the payment to next month and then the next and then the next. Before you know the debt becomes unmanageable.

Pankaj Jain.29. sales executive, is a happy go lucky chap. He works hard and loves to have fun too. By the middle of the month he starts running low on cash. Cash withdrawal from the credit card and payments on the credit card seem like the best option to him. Of late, he noted that he has been barely able to pay off the minimum balance due and the total amount due has been rising dangerously. Though he has reduced his spending now, each month the interest has been mounting and it was swelling the total amount due. Pankaj need some serious debt management

Steps to manage debt

  1. 1.    Change the lifestyle causing debt

In most cases debt mounts up due to excessive spending and lack of checks and balances. Very often these are not even big or asset building expenses. Most often the credit card is whipped out on impulse buys for clothes, accessories or to pay restaurant bills.

  1. 2.    Stop using the credit card

Don’t reduce it – just stop. Put the cards in a sealed envelope in the darkest corner of your cupboard. If you have to pay Rs 5000 for a pair of shoes in cash, it will pinch much more than paying by card. It will also help you curb impulse purchase after all you cannot buy more than the cash you are currently carrying.

  1. 3.    Take a loan

The overdue interest you pay on credit card debt is between 36% – 40% p.a. 10-15% more than what you would pay on an unsecured personal loan and 20-25% more than a secured loan such as a home top up loan or loan against an LIC policy. Look at all your option and make some calculation. Lastly, do not let your ego come in between taking a temporary loan from close family if offered.  Avoid settling with the bank or defaults since will reflect poorly in your credit report and you may be rejected for a loan when you need one.

  1. 4.    Understand where you are overspending

To make change permanent it is essential to understand the problem areas. Take your credit card bills of the last 1 year and try to figure out which are the high spending items there. Is that Rs1800 shirt you purchased a year ago still in use? Would it not be of much better value if you had brought one for Rs500?

  1. 5.    Set up a budget

Budgeting does sound boring but wallowing in debt is far worse. So you need to allocate your spending prudently. Till your debt is fully repaid ALL unnecessary expenses have to curbed include the evening coffee at Starbuck.

  1. 6.    Be prepared

When the debt is repaid one breathes a sigh of relief and then goes back to the same destructive behaviour. It much like going on a strict diet and then binging. Be prepared for the urge for financial binging. Living within your means is not difficult as long as you have made up your mind to do it.

 Article first appeared in Credividya.com

Why are interest rates on credit cards so high in India?

 

 

This is Guest post by Vinod Chand.

 

Of late there has been an increase in the interest rate that the bank is offering you on your fixed deposits. When banks pay you more money it translates to a higher cost of borrowing for them.

While banks are offering up to 9.5% on a one-year fixed deposit, they are charging up to 13.5% to people who are borrowing from them. This translates to a spread of about 4%.

But banks deal in many products. Amongst them are home loans, personal loans, vehicle loans, credit cards, etc. Similarly on the deposit side bank are having savings accounts on which they are paying just 3.5% interest per annum.

On the lending side, banks have quietly raised the interest rates on credit cards to as high as 49% per annum. Recently National Consumer Redressal Forum passed an order restricting the interest rate on credit cards to 30%. Most of the foreign banks including Standard Chartered, American Express, CitiBank, etc. have gone in appeal against this order to the Supreme Court of India and sought a stay on the order of the National Consumer Redressal Forum. For the time being Supreme Court has rejected the demand for the stay.

Interestingly in the affidavit filed by the banks justifying the high rates are reasons such as high cost of acquiring a customer, setting up his account, providing phone banking services, making telemarketing calls are cited as reasons.

It would make an interesting study to compare the operations of credit cards across the globe. Cursory research on the internet points to the following

Benchmark Rates in India

Percentage

Benchmark Rates in US

Percentage

Bank Rate

6%

Bank Rate

2%

Prime Lending Rate

12.75% to 13.25%

Prime Lending Rate

5%

Savings Bank Rate

3.5%

Savings Bank Rate

0.4%

Fixed Deposit Rate

9.5% for One Year

Certificate of Deposit

1.98%

Citibank Platinum

49% APR

Citibank Platinum

8.49%

Citibank Platinum Cash Advance

19.99% APR

Citibank Platinum Cash Advance Fees

24% APR

Home Loan

11.5%

Mortgage Loan

4.75% to 7.75%

From above information it becomes clear that there is a huge gap between the rates charged on credit cards in India and the US. While the gap in bank rate is just 4% (translating to 300% increase) the gap in Credit card rates is 41% translating to an increase of more than 600%.

Amazingly the delinquency rate in India is much lower that that in the US. In India, insolvency laws are myriad and declaring oneself insolvent rare.

Even after being armed with a Credit Information Bureau in the form of CIBIL, credit card issuing banks are painting all their borrowers with the same brush. Each one of the card holder is being charged the same rate of interest taking shelter under the reason that there are defaulters who are making doing credit card business expensive.

The questions to ask here are, when bank are aware that this is a very high risk business, justified by then by charging very high interest rates, why are they indulging in it?

Why not stick to regular business of banking where you borrow from your own account holders and lend rather than borrow from anyone, including RBI, fellow bankers and lend to high risk products?

When rates dip, business increases. Take the example of mobile phone call rates. Once upon a time it used to cost 16 rupees to talk for a minute on the mobile phone. Even incoming calls were to be paid by the called person. When rates started dipping, mobile penetration increased by leaps and bounds.

I think banks need to look inward to curtail their lending rates. If the rates were low, more people would use credit cards. Even rolling over credit card dues would then not lead to a debt trap which it currently does in most cases. Banks need to reduce their cost of operation rather than try to transfer the high cost to the hapless card holder. They need to shun the five-star culture of their operations.

As the Supreme Court is seized with the matter, I am sure good sense will prevail and an errant government, Reserve Bank of India, which has let this situation happen by not giving proper guidelines, along with the banks will be reined in as far as interest rates on credit cards are concerned.

Interesting Links

http://www.smartmoney.com/nowwhat/index.cfm?story=credittricks

http://www.smartmoney.com/debt/advice/index.cfm?story=digoutofdebt

http://cardweb.com/

http://www.online.citibank.co.in/portal/newgen/service/service_charges.htm#4c

Interesting calculator that allows you to find out how much interest you will pay if you stop spending on your card and make a fixed payment every month. I tried with 20,000 and a fixed payment of 1000 (5%) and it came back with an amazing detail of 23,037 as interest and a payment period of 43 months (3 Years and 7 months). This does not include the annual charges that you would per force have to pay since you have an outstanding on your card!

http://www.smartmoney.com/debt/calculator/index.cfm?story=loancost

A professional from the Information Technology field and an entrepreneur at heart. With more than 20 years of experience, he has been involved in IT Training, Software Development, Web Portal Development. As part of his attempt to give back to the society, he does credit counselling for people distressed by credit card and other debts. He is the General Secretary of Credit Consumers Association of India, a non-profit body. He can be contacted at vinodchand@gmail.com. He also blogs passionately at www.creditconsumersassociation.blogspot.com