The other day, my secretary discovered that I was the former Managing Director of the Credit Information Bureau Limited (CIBIL) of India. Immediately, she sheepishly sought my advice as she was getting calls from recovery agents who were threatening that they would report her name to CIBIL, after which she would never get a loan or a credit card in her life. She had not repaid the outstanding dues on five of her credit cards.
In my mind, I was thinking, “Wow! What did I help build? An organization that has replaced the proverbial hockey stick?” On a more serious note, with some gentle prodding and not so subtle questioning, I discovered the following amazing facts:
• She had 5 credit cards with limits ranging from Rs 15,000 to Rs 30,000, in all aggregating to a limit that exceeded Rs 1 lakh.
• She had applied and received these cards in the days of ‘indiscriminate gathering of credit card accounts’ by lenders.
• She was using them rather irresponsibly to pay for things she intuitively wanted, not thinking about how she would pay back the accumulating outstanding balance.
• She was paying the ‘minimum amount due,’ feeling smug about the fact that she was never late to pay it.
• She had now realized the very high cost (over 30 per cent) of not paying the rest of the outstanding amount on time.
• Due to the interest rate payable on the outstanding amount, the dues had ballooned to a huge amount.
• The aggregate outstanding amount was so high that she was unable to pay it.
That’s how she had invited calls from recovery agents. Over the next few months, we worked on a specific plan and weaned her away from this huge debt trap, of course, with a little bit of help from friends and family, some counseling, and a large dose of imposed discipline.
Soon, she was relieved from the threatening calls, her credit history improved, and she started “hating” plastic with vengeance, having seen what it did to her financial situation and peace of mind. As a bonus, her efficiency at work improved too!
For all of us, the lessons to take from this experience are:
• Do not apply for / acquire credit cards beyond what you need.
• Cancel or close credit cards you do not use.
• Do not swipe cards beyond your capacity to pay all dues on the date the payments are due.
• Remember you have to pay – swiping means delaying that, and not wishing it away!
• This delayed payment comes at a huge financial cost – interest rates on outstanding credit card dues ranges between 30-38 per cent per annum.
• Paying only the minimum balance is no answer – in fact, it compounds the problem as it lulls you into a false sense of complacency and belief that you are in control of your card bills. Don’t forget the huge interest on the unpaid amount.
• Always pay your credit card dues on / before the due date.
• Do not put yourself in a position where the payment due hangs on you like a sword.
• Use your credit card as a tool of convenience, and not as a tool to leverage your current income in order to borrow multiples of that income.
• Before you swipe that card, ask yourself – “Do I need this? Can I pay this amount when my next salary comes into my bank account?” If the answer to both these questions is ‘YES,’ then go ahead and swipe away!
Follow these 10 commandments and plastic money will never dominate your life.
On a lighter note, a bank called its credit card customer to say – “Your credit card payment is outstanding!” To this, the customer grinned from ear to ear and said, “Thank you for the compliment!” You sure don’t want to be in that position!
ABOUT THE AUTHOR
Satish Mehta is the Founder and Director of www.credexpert.in – a credit and debt counselling company that provides end to end customized counselling to individuals by handholding them through their credit life cycle.