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Credit Cards are not bad – You just need to understand math to use it wisely

Credit Cards are not bad - You just need to understand math to use it wisely - (A)

I’m sure I’m not the only one who says that credit cards are extremely useful. But from time to time they get a bad rap when some misuse them. So does that make credit cards bad?

No problem.

Some think that credit cards can cause them to spend more than they should. But if so, the problem lies with the cardholder, not the card itself.

I recently spoke with a young cousin who “bragged” about having seven credit cards. I asked him if it was just vanity or if he used them too.

He surprised me to learn that he used them too recklessly. He overspent and couldn’t pay the full amount each month. A couple of times he paid the minimum due, and some months when his expenses were a little higher (in his own words) he didn’t even pay the minimum due.

It is not uncommon. But the problem (or evil) is not on the map. On the contrary, people do not understand the real devil here.

And that’s it – extremely high credit card rates.

But if you have a good understanding of this demon and the math behind it, you can easily tame it.

Do not be crazy; Only pay the MAD

In credit card terminology, MAD stands for Minimum Amount Due. This is the minimum amount you must pay before the due date to maintain your card account regularly. By paying the minimum amount, you avoid late fees and negative effects on your credit score.

But rest assured, you still have to pay interest on the outstanding balance. And I’m sure most of you know that credit card interest rates can reach close to 40% per year.

Let’s take a very simple example to better understand this.

Suppose your current credit card is Rs 30,000 and the minimum amount due is Rs 1,500.

What are your options now?

  1. You can pay the full amount due Rs 30,000 before the due date2. You can only pay the minimum amount due of Rs 1,500 before the due date
  2. You pay nothing (never choose this option)

The following happens each time:

  1. There is no interest to pay because you have paid off all your debts and there is nothing due on the due date. The interest (for the month) is calculated at Rs 28,500 (Rs 30,000 – Rs 1,500).
  2. Interest will be charged in the total amount of Rs 30,000. Also, late payment charges will apply as you have not even paid the minimum amount due (Rs 1,500).

Cardholders often believe that paying the minimum amount due is enough. It is not. I repeat, it is not. In this way, you avoid fines for late payment in any case. However, you will still be charged high interest on the unpaid amount.

And that’s not all.

If you do not pay the card in full, only then will you receive the interest-free credit period for subsequent transactions. And that’s what’s killing credit card users financially.

Let’s continue with the previous example.

Suppose you only pay the minimum amount of Rs 1,500 after receiving an invoice of Rs 30,000, which leaves Rs 28,500 outstanding.

Now, if you reissue a credit card for say Rs 15,000 after the expiry date, you won’t even get a one-day interest-free period. You will be charged interest from the first day after the transaction and not from the due date of the next bill.

Therefore, you will pay more interest on Rs 28,500 (initial outstanding amount) + Rs 15,000 (new charges) + interest on the previous outstanding amount.

Is there any trick/hack around all this?

My main suggestion would be to never get into tricks like using revolving credit cards, managing multiple cards, etc. to get the longer interest-free periods that many influencers are touting these days. Instead, keep it simple and make sure you pay your card bills in full. Not just the minimum amount due or even a rupee less than the invoice amount. If you have trouble controlling the urge to spend, stop using the cards. Try to follow simple rules like “If I can’t afford to buy something with cash, I won’t buy it with my credit card” OR use your credit card as a debit card. Only spend what you can immediately share.



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