Festive Spending: Maximize rewards with the right cards, stick to planned purchases
According to the Axis Securities Credit Cards and Digital Payments Business Monitor report, there has been a marked shift towards the use of credit cards compared to debit cards. In August 2024, spending on credit cards was 3.9 times higher than on debit cards, compared to 2.8 times in August 2023.
While credit cards have become the preferred payment option for many, it has also led to concerns about over-indebtedness, especially during the holiday season. Banks are partnering with major e-commerce platforms and offering discounts and monthly installment options (EMI) on credit card purchases to entice customers. E-commerce platforms offer irresistible deals. This can encourage overspending.
It seems like a win-win situation for everyone. “Buyers get deals at lower costs. E-commerce companies can boost their sales, and credit card companies benefit as customers avail their credit at high interest rates,” said Abhishek Kumar, Securities and Exchange Board of India (Sebi) registered investment advisor and founder, SahajMoney.com.
Experts warn against excessive debt. “Credit card debt comes with high interest charges and stiff penalties. If you don’t repay on time, the costs will skyrocket,” said Adhil Shetty, CEO, BankBazaar. Individuals can quickly find themselves in a debt trap.
Avoid ATM withdrawals
There are significant fees associated with withdrawing credit cards from ATMs. “You will be charged an immediate transaction fee, which is a percentage of the amount withdrawn,” Shetty warns.
“Never do this as interest is charged per day,” says Mohit Gang, co-founder and CEO of Moneyfront. Interest rates for such withdrawals can range from 24 to 46 percent annually.
Compound interest rate fall
Credit card accounts typically offer two payment options: the total amount due and the minimum amount due; the latter is approximately 5 percent of the total. Although paying the minimum may seem convenient, it can quickly lead to an accumulation of debt.
“The unpaid balance carries a monthly interest of 2 to 4 percent,” says Shetty.
A late payment leads to a fine, which according to Gang can be up to 30 percent. Add to that the 18 percent GST in interest and penalties and the burden becomes heavy.
To avoid these pitfalls, experts recommend paying off the entire balance within the interest-free period. Gang notes that failure to pay even the minimum amount will result in a default, which will hurt your credit score.
Avoid festive overspending
The festive season often encourages impulsive purchases, especially after receiving a Diwali bonus. “Allocate some of it to savings or investments, rather than spending it all,” says Gang.
Kumar suggests making a list of necessary purchases and sticking to it, while Gang advises comparing prices across platforms to ensure the best deals.
Credit cards offer various benefits and rewards (see box). “Manufacturers of high volume electronic products have ties with card companies. See which card offers the best discounts and cashbacks,” says Shetty.
Managing credit card debt
Kumar recommends that credit card EMIs should not exceed 30 percent of your post-tax income.
To reduce existing debt, he recommends using liquid savings to clear high-interest credit card balances. If that’s not feasible, cut back on discretionary spending. You can also consider paying off your credit card costs with a personal loan or an overdraft, both of which usually have a lower interest rate.
First publication: Oct 04, 2024 | 6:32 PM IST