We will discuss a little about the new age, highly intimidating “Buy Now Pay later” or “split your bills into easy EMIs” or “credit cards”. All three of them have one main objective -
Make you Spend More.
Credit cards
Credit cards are a great tool. They give you excellent rewards, you pay the bill later, you get a lot of freebies. But they do one more thing. They make you buy things you can not afford. I know a lot of us get into a trap of credit bills. We use credit card for all our expenses, we sweep our entire salary into paying the bill. We spend with credit card again the next month and sweep our salary to pay the bill. We get in to a trap of having to use our salary to pay the bill every month. Again and again. This is one trap that feels like we just can not get out of. Paying just the minimum amount is also not an option here. The interest rates that follow (~25% annually) are way out our league and it makes it all the more difficult to get out of the trap.
The only way to get out of your credit-salary cycle that we got into is by being stingy for a few months. You have to be very thrift with your spending at least till you have it in control. First thing you have to ensure is to not take your credit card out of your pocket. I mean the use of your credit card has to reduce drastically. This will bring down your bill amount slightly next month. That in fact helps a long way ahead. Its like a ripple effect. Next month you have a slightly more money in your debit card. You can now use this to make necessary payments instead of credit cards. This will ensure you know your limits and doesn’t let you spend beyond what you can. Doing this judiciously and repeatedly for a few months can bring you out of this situation. And we will take a oath to never get into this cycle ever again.
You can consider converting big purchases into EMIs if you can not be paying it in full. A lot of times banks charges interest but these are much lower than whar they charge you on unpaid dues. The interest rate will vary based on your tenure. Try to opt for the tenure that balances your repayment capabilities and interest rate.
Now comes the question, is credit card really bad?
The answer is No.
In fact it is recommended to use credit card over your debit card. It has a lot of benefits. But the trick here is to know your limits and to be cautious about your spending. Credit cards gives you offers. It gives you rewards. It gives you points that can be redeemed later. It gives you cashbacks. It gives you free money for a few days. It gives you extra protection against frauds. It also improves your credit score. None of these is available in your debit card. You have to spend your money which could otherwise fetch some interest.
Credit cards are a great tool when you can manage your finances.
If you are one of those who can not control your spending, keep your credit card inside your almirah and lock it up. Do not take it out unless its an emergency or you are getting a good offer when you have to make a purchase. But if you are one of those who can convince self and wish to manage your money better, use your credit card. Have not more than one credit card at least to start with.
Whenever you use your credit card, remember to
Spend with in your limits
Pay the entire bill and not just the Minimum Amount Due (MAD)
Never withdraw cash from ATMs with credit cards
Buy Now Pay Later (BNPL) or Split your bills
Like credit cards, the new age schemes of “Buy Now Pay Later” (BNPL) or “Split your bill into easy EMIs at not extra cost” are the packages that make you buy more. They bank on enticing you to spend more than what you can.
Think of it this way. You want to buy a new phone. You wish to own a recently launched iPhone but you know it is out of your budget. You do your research and settle on another phone that costs much lower. You open your ecommerce app to make the purchase. A header pops up saying you are eligible for BNPL offer and you get a good instant discount on opting for this. Or an option that says you can buy the product now and split the bill in to next 6 monthly EMIs with out any other costs. You think this is gold. You don’t have to pay everything today. You can pay with your future salaries. What’s better ? You get a good discount too. You select the iPhone, choose the best of specs and you buy it.
Suddenly your purse size to make a purchase is wider. These companies know that you always would wish for a more expensive item. They nudge you to make that impulsive buy at ease.
This is how it works. When you make the purchase a third party company (that is offering you these schemes) pay the retailer (ecommerce company) and wait for you to make the payments. The ecommerce company is happy. They want you to get hooked on to these products. They want it to be your go to choice. That will eventually make you buy products that is more expensive than what you otherwise could afford. Why wouldn’t the retailer be happy if they can nudge you to increase your spend. But we on the other side end up spending more than what we would actually require. We may even underestimate our future expenses and find it difficult to repay later. This is exactly these third party companies are banking on.
They earn when you miss your payment.
Understand that these companies or banks earn from the interest charges you pay. They carry one of the highest rate of interest among all the options out there. You may be able to avail a personal loan at a lower rate of interest. Never get bogged down by these products. They are designed to entice you to buy more. They can drag you in to financial troubles. You may end up losing a lot more than you actually stand to gain. These are best to avoid if you are not the one who can manage your finances well. One miss on payments can take a hit on your credit score too.
Pro tip:
First, list down all the debts you have. Classify them into two categories – Good Debt and Bad Debt. Good Debts are the ones that generate more wealth. Like a loan taken to buy an asset that increases your income or has a future value. Education loan could be classified as a good debt as well. In some cases like rents it takes care of the repayments as well. If it does not, it’s a bad debt. Also as mentioned in the beginning of this post, credit card debt is also a bad debt. You have to pay for it from your pocket. It more often than not is also depreciating in value.
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