Tips on Effective Credit Card Usage

No don’t worry, this is not another spiel on how you should use credit card within your income limits. This is neither a guide on how you should not overburden your finances by splurging on credit cards as if there is no tomorrow. Certain level of financial prudence is assumed on the part of the card user. Then what exactly is the theme of this article?

Well this article is about how to use credit card most effectively or efficiently. In other words how to extract the most out of your credit card – WITHOUT paying any charges. I repeat, WITHOUT paying any charges. Am also including some practical tips gained by using multiple credit cards over the years.

• First and foremost, NEVER regard your credit card as a financing mechanism. Use it just for operational convenience and “float” enjoyment. By float I mean “Free money”. Now what do I mean by Free Money. Let me explain by way of an example. Suppose you want to buy a LCD TV for Rs 50,000. Broadly speaking, you have two options. First, pay upfront by cash or debit card. Second, make your payment by credit card. Remember, you should not be using credit card if you do not have the Rs 50,000 needed to buy the LCD TV. Do not swipe the card without thinking how you will repay the credit card company. That is recipe for disaster. Now assuming you have the Rs 50,000 lying in your savings bank account, you have to decide between swiping the debit card or credit card. If you swipe the debit card, there is an instant debit to your account and your savings bank account balance goes down by Rs 50,000. However if you swipe the credit card, payment has to be made only after 20 to 50 days depending upon the billing date and due date. Thus for this interim period you enjoy the money without any cost. This is what I will call “Free Money”. Now what can you do with this free money. You can keep it in savings account, but that will give you only 3.5% interest. You can create a Fixed Deposit or you can invest this money in a liquid mutual fund. Whatever you do with this money and whatever return you generate is essentially without any cost. Great option, if you are one of those who believe risk less “free money” is always welcome.
  
  
• Milton Friedman, Nobel-prize winning economist, once famously quoted, “There is no such thing as a free lunch”. So if the credit card company is providing you with free credit for 20 to 50 days, it would be recovering it some way or the other. Okay agreed that the card company would have other revenue streams, like the collection charges it levies on the card accepting merchants, but for the time being let’s restrict our argument to credit card issuer’s revenue from the card swiping consumers. So assuming most of the consumers pay up within the due date, the card company has to recover the required revenues from card consumers, from the set of consumers who are using credit card as financing mechanism. In effect it means that the credit card issuer has to charge high interest rates and charges from their financing customers. And believe me, this is exactly what they do. Starting from huge late payment charges to interest at exorbitant rates. This brings us to our next rule. Never miss a payment date. You will get killed in the late payment charges and interest costs. In India most of the credit card companies charge interest at anywhere from 18% to 60% per annum!!
  

• Keep track of the due date, which is the date by which the credit card outstanding should be paid off in order to avoid late payment charges and interest cost. Always pay couple of days before the due date. If you paying by a cheque, keep in mind the cheque clearance time. Basically, don’t give a chance to the credit card issuer to claim your payment was received after the due date.

• Also keep track of the billing date, which is the date on which every month the credit card issuer generates your bill. How exactly will knowing the billing date going to help? Well let’s assume you maintain multiple credit cards, each with different billing dates. Use the credit card where the billing date has just gone. This will ensure you enjoy maximum interest free period. For example you have ICICI Bank credit card with billing date 9th of every month and due date 30th of same month. You also have HSBC credit card with billing date 19th of every month and due date 10th of next month. Thus if you have to use credit card on 15th July 2008, it is advisable to use the credit card where the billing date has just gone. Thus use ICICI Bank credit card and enjoy interest free credit period of 46 days (from 15th July 2008 to 30th August 2008). Instead if you swipe HSBC Card, you get interest free credit period of only 26 days (from 15th July 2008 to 10th August 2008).


• Avail attractive Balance Transfer offers. Time and again credit card issuers keep coming with Free Balance Transfer offers. In a typical Balance Transfer, on the due date for making bill payment, instead of directly making the payment, you get one of your other card issuer to clear you outstanding. Normally the card issuer who is paying off your outstanding will start charging interest immediately. Let me explain through an example. Suppose you hold American Express (Amex) and State Bank of India (SBI) Credit Cards. There is an outstanding of Rs 100,000 on the Amex credit card. On the due date instead of making the payment directly to Amex, you request SBI for a balance transfer. SBI will prepare and send you a draft / pay order of Rs 100,000 payable to Amex, which you deposit with Amex. Thus your dues to Amex are paid off and the outstanding balance gets transferred to SBI. Typically SBI will charge a processing fee and interest from the date of balance transfer. At times, in order to promote their credit card, issuers keep coming with free balance transfer scheme, wherein no interest is charged on balance transfers for some period of time. For example SBI may have a scheme where for 90 day balance transfer, no interest is charged for initial 45 days. There may be a small processing fee which also is waived off in some cases. Now in such cases what you need to do is do a balance transfer to SBI and end of 45 days you pay off SBI. This way you don’t have to pay any financing charges to SBI and you end up enjoying “free money” for another 45 days.


• Never default with any credit card company. This is very important. Do not tarnish your credit history. With the establishment of Credit Information Bureau India Limited (CIBIL), your entire credit history is recorded and available to your future lenders. If you have any dispute with credit card issuer, talk to them and try to arrive at a mutually acceptable resolution. Request for waiver of charges citing your usage history and past payment track record. Most of the times if your past usage is regular and payment record clean, the card issuer will waive off the charges, if they are nominal in amount. Remember the card issuer is also earning money every time you swipe the card, through the amount they charge from the merchants. If the card issuer is unwilling to waive or reduce the entire charges / interest cost, assess if the charges / interest cost have been validly levied. For example if you actually forgot to pay the credit card bill on due date and have been slapped late payment charges and financing charges, you should pay the same and clear your dues. Do not just ignore the bill and leave the credit card issuer to put your account in default.


• Be careful, Taxmen is watching. Overall usage of credit card should be for amount which is commensurate with your declared sources of income. Tax authorities are very closely monitoring credit card usage and picking up cases where credit card usage and declared sources of income doesn’t seem to tell the same story. Credit card issuers are required by law to submit Annual Information Return (AIR) with the name and Permanent Account (PAN) number of all credit card customers whose annual usage exceeds Rs 200,000. This information is collected by Income Tax department and digitized in the Tax Information Network (TIN). Now the Income Tax department has all the information at the click of a button regarding credit card users with their PAN numbers.


• Avoid transactions over net on unknown websites. Ideally use Virtual Credit Card for online transactions. Some of the banks have recently started offering VCC, which does not have any plastic existence but can only be viewed online and can be used only for online transactions. Key details of the VCC like the card number, expiry date, etc. are visible online. The initial credit limit of VCC is normally set at Re.1 and the user can increase the VCC limit online, within the overall limit of the primary card. Some of the banks which are offering VCC in India are ICICI Bank, HDFC Bank, Kotak Mahindra Bank, etc.


• Avoid transactions at too many petrol pumps through credit cards. Use your credit card only at reputed petrol pumps. There have been too many fraud cases recently where the petrol pump employees have copied credit card and Card Verification value (CVV) numbers and used the cards to make illegal airline ticket purchases online.


• Redeem reward points in time. At times reward points have validity upto a particular time. For example reward points may expire every 2 years, i.e. reward points must be utilized within 2 year of earning the same. Preferably choose the credit card where reward points can be converted into cash. For example Deutsche Bank credit card allows users to adjust convert reward points against any card outstanding, effectively meaning reward points are converted to cash.
  

I would like to share an important 'gotcha' with defaults and settlements on credit cards.

If your Credit Card company issues a 'settlement' for a part of your total outstanding, you are still tagged in the CIBIL database. This is not made clear to you while the settlement is offered by the credit card company, but you will repent the settlement later when no one extends any credit to you.