Credit Cards today have become a way of life for most of us. It is no longer the privilege of the few. It is also having wide acceptance beyond the five star hotels and airline offices. Today one can buy groceries or Petrol or Train tickets through Credit Cards. At times of medical emergencies hospital bills can be paid out of Credit Cards. As a tool of convenience , Credit Cards are therefore an essential part of our wallet.

On the flip side however, Credit Cards are the main culprits to encourage overspending in individuals and take away or substantially reduce the saving potential. If not controlled, Credit Cards can induce compulsive buying and make a person an eternal debtor. It can lead the user into a debt trap and force him to lose heavily in terms of interest and service charges far beyond the capacity of the person to bear. It is for this reason that a discussion on how to effectively use a credit card becomes an ingredient of a portfolio build up.

Credit Cards as we commonly know, are essentially of two types, namely the Charge Cards and the Credit Card. A new vareity of plastic money called Debit Cards is also slowly making inroads and would be available widely in a few years . The Charge card is one where the purchases made out of the card are to be paid in one lump sum at the next payment time. There is no provision to carry over the payment except as a defaulter and frequent delinquency can lead to cancellation of the card.

The Charge card therefore provides only the convenience in making payments and not Credit as such. Even then, since there is a time difference of around 15 to 45 days from the date of incurring of the expenditure to the actual date of payment, there is an element of credit in the transaction. What is good about Charge cards is that if the payment for the card is made as per the agreed terms then there would be no interest expense for the user. Diner's Club Card and American Express Cards belong to this category.

A user of a Charge card has to incur only the annual membership fee for the convenience of using the card. Speaking of the economics if one were to pay a sum of Rs 2500 per annum as membership fee in advance, it means that you would be incurring an expenditure of nearly Rs 200 every month just to carry the card around. You should therefore consider that the opportunity cost of holding onto the card is about Rs 2800 per year.

Users should also remember that whenever the card is used for cash withdrawals or for Railway ticketing, there may be an additional service charge that may be levied at an interest cost of around 48 % p. a. The use of cards for such purposes should therefore be avoided except in a grave emergency.

Since the Charge cards also require you to pay the monthly bill in a lump sum, if you are a salaried employee you should pay all the monthly expenditure incurred out of the card from your next monthly salary. It is therefore extremely important to watch the "Due Date" for the monthly payment and ensure that it falls in the first week of a month. For Example Diners Card normally has a convenient payment date around the 7 th of the month. American Express however often fixes the payment around 23 rd of a month which actually means that the expenses incurred during the beginning of the particular month come for payment before the monthly salary is out. The user must guard against such unviable payment schedules .

There is however one reason I consider Charge Cards like Diners Card a viable proposition. This is because the holder of the card is entitled to an automatic Accident Insurance of upto Rs 25 lakhs besides some other benefits. Diners also has a concessional medical insurance scheme under the Medi-claim policy. Infact if you intend using the Sec 80 D facility for IT exemption and invest around Rs 8000 per year for Hospitalization Insurance, the savings in the insurance premia as a Diners Card holder is more than the annual Card membership fees. The Card therefore comes free to such persons and is the most compelling reason to get this card.

Unlike the Charge cards like Diners Card and American Express card, where the out-standings are to be repaid in one lump-sum, the Credit Cards issued by various Banks under the umbrella brand names of Visa or Master provide a facility of paying a small amount of the out-standings (say 5%) and carrying over the balance. While this is definitely a feature, which provides the flexibility to the Card holder in paying the balance in installments, it is also the feature, which often lures an unsuspecting user into living beyond his means.

If one were to use a credit card for carrying over the payments, the card will soon reach its drawing limit and from then on it will also be a Charge card where the entire usage of a particular month has to be paid for in the following month only. The limit can thus be looked at as a one-time facility. It can only be effectively used to make small consumer durable purchases or festival season purchases with repayment spread over the next few months.

The usage of the Credit card as a facility to "Buy now and Pay later", has a cost attached to it. Normally the balance outstanding in the card account may be charged an interest of upto 30% p.a. If the balance exceeds the available limit, there may be a penal charge of upto 48% p.a. If Cash advances are availed, there would be a transaction charge of around 30% to 36% p.a. in addition to the interest charges if the credit limit is in usage. The cost of cash drawings could therefore be around 60%p.a. or more.

Yet another important point a card user has to bear in mind is that if the credit limit is in usage, the subsequent month's purchases will be charged interest from the date of the purchase itself. This means that even if the cardholder tries to pay of the month's usage in the immediate following month itself, he would be incurring interest charges. Once a card holder has availed the limit, it is therefore advisable for him suspend use of the card for his regular monthly purchases which he would any way be Apr. 17, 98capable of paying in cash.

Another point where caution is to be exercised is in prompt payment of the monthly bills. If the monthly payment is delayed beyond the due date either because of holidays or due to lethargy even by one day the card holder may be charged one full month's interest or a minimum service charge which could be substantial in terms of interest cost.

The emphasis on the interest cost of credit card usage given above is not to discourage its use but to keep ourselves on guard from fallinguu into a debt trap where the monthly interest itself becomes more than the saving / repayment capacity of a card holder.

The right way to use the credit card is only as a means of convenience and to repay the entire outstandings promptly every month as in the case of a charge card. You would then not incur any interest cost and the membership fee becomes the only cost. Against this membership fee,you avail the benefits of Personal Accident Insurance and any other facility you can enjoy as a card holder. Obviously if you are going to use the card only for emergencies it is necessary to look for a card with the least cost. Cards issued by some of the Nationalised banks and Grindlays Bank amongst the foreign banks have a high cost-benefit equation as of today.

For those of you who would like to have the convenience of a credit card but donot want to or need to expose yourself to the temptation of credit induced spending, The "Debit Cards " should be the ideal choice. Debit Cards are only making there entry now and are available in limited pockets in Delhi through Escorts Finance and in Hyderabad through Model Finance. These cards provide an option to deposit money in advance with the card issuing company so that when the card is used the amount is automatically debited to the account. There is an interest which the card-issuing agency may pay on the amount deposited or the average positive balance maintained in the account. Since these services have been introduced recently, and by private sector companies , they are yet to receive wide popularity amongst shopkeepers.

But in the future every Bank which can issue a "Debit card" may load the card with features of a credit card also and these "Smart cards" are likely to rule the world of "Plastic money".

While we wait for one of the most progressive of the Banks to introduce the "Universal card" with features of a Charge card,Credit card, and the Debit card rolled into one, let us use the available credit cards judiciously and avoid being robbed of our saving potential with impulsive credit card buying.

Na.Vijayashankar

17/04/98