Though the season of excesses is now behind us, it is never too late to learn some lessons on prudent borrowing. And what better time than the new year to put the learnings into practice? Here are seven points you need to bear in mind before swiping your card, or for that matter, knocking on your bank’s doors for a personal loan, this year:
The ‘minimum amount due’ trap:
It is a mode of clearing your outstanding credit card dues that seems very convenient — paying only 5% of the amount every month to prevent the bank from initiating any action against you. But you need to remember that even if you pay this amount every month, it will not be able to rescue you from the debt trap.
With the interest on the balance amount being a hefty 39-45 % per annum, the outstanding amount is unlikely to shrink in a hurry. The ideal approach, therefore, is to use your credit card merely as a facilitator and ensure that the bill is cleared before the due date.
The lure of ‘loyalty cum credit’ card:
If you have ever visited malls and supermarkets, chances are that you have been offered a ‘membership’ or ‘loyalty’ cards a number of times. The store staff often cajole you into signing up for one – after all, there’s nothing to lose, and scores of points to be gained on every purchase made that will entitle you to discounts. Most of them score high on utility, no doubt, particularly if you shop there often. However, you need to be wary of cards that insist on you using them for spending – these could be co-branded credit cards that carry at least an annual maintenance charge, if not an enrollment fee.
‘Easy’ cash from credit card:
In an emergency, you can use your credit card to withdraw cash from an ATM. That may be reassuring, but you need to remember that you will have to incur additional charges – around 2.5% of the amount withdrawn – for the purpose. “Many are not aware that in such a case the payment becomes due from the date of withdrawal and not after the expiry of the credit period,” says VN Kulkarni, chief counsellor with the Bank of Indiabacked Abhay Credit Counselling Centre.
The ‘real’ credit limit:
You may know your credit limit courtesy the figure indicated by your card issuer, but are you aware of what it is made up of? It is not restricted to the amount spent using the card alone. “Several cardholders are ignorant about the fact that the limit includes any penal charges levied by the issuer,” explains Madan Mohan, chief counsellor, ICICI Bank-supported Disha Financial Counselling Centre . If you exceed the limit despite being in the process of paying interest on any earlier outstanding amount, you may have to shell out overdrawing charges. To avoid these charges, make sure you read the terms and conditions of your credit card thoroughly.
Dangerous leveraged investments:
The New Year apart, January 1, also heralds the tax-saving season, prompting insurance agents and mutual fund distributors to persuade you into making tax-related investments. If you find yourself short of cash to make those investments, you may feel tempted to use your card or take a personal loan to tide over your ‘temporary’ fund shortage.
A fundamental mistake, and the one that can burn a bigger hole in your pocket than what the tax outgo would have otherwise done. Such investments could come to haunt you later as they come with a lock-in period or necessitate recurring payments. Therefore, if you must borrow, do so only when you are assured of a fund inflow capable of clearing the debt in the near future.
A record of your credit history:
The credit report – issued by credit information companies like Cibil ( Credit Information Bureau )) and Experian – is a record of loans you may have borrowed in the past. It is an indicator of whether you have been a good borrower – that is, if you have been regular in repaying your loans – and is one of the factors that banks take into account while sanctioning a loan. Therefore, it would be a good idea to regularly monitor your credit history. If that is not possible, ensure that you obtain your credit re-port before approaching a bank for a loan.
Importance of a no-due certificate:
One of the most common pieces of advice doled out to borrowers, especially to those who close their loans under a compromise settlement with lenders, is to insist on a no-due certificate. It holds the key to the approval of your loan applications in the future. While the settlement may spare you reminder or follow-up calls from bank, it is only the no-dues certificate that will back your claim of having a clean slate.
Along with this, make sure your bank gives you an assurance that the settlement will be intimated to the credit information companies so that your credit record is updated accordingly. If, anytime in the future, your loan request is turned down because of an unfavourable credit history,you can produce the documents as proofs of complete repayment.
