Do you revolve your credit card dues by making only minimum / part payment? Doing so is going to lead you into financial disaster. However, if you use an app like Walnut that tracks your spends and gives you timely reminders on upcoming bill payments, you can pay your credit card dues in full and avoid the debt trap too.
A friend gives you a loan that you promise to pay back in a month. For some reason, you are not able to pay it back in time. The friend, like any typical friend, says, “Never mind yaar, take your time”. You of course, are a little embarrassed.
What then, if you hadn’t borrowed from a friend, but from a complete stranger? Would that take care of the embarrassment? To a degree, of course. But, the first question that would pop is, “Why is a stranger giving me a loan that I can take my time to repay?”
What. Is. The. Catch?
This stranger is your credit card company. And yes, there is a catch.
A credit card company is a business and it exists to make a profit. Whenever you use your credit card to make a payment, the credit card company takes care of it and pays the merchant. It, of course, wants you to pay them back by the due date.
If you do not pay the amount in full by the due date, an interest is charged. Usually, purchases made during the billing cycle enjoy a 45-55 day repayment period (depending on where in the cycle you made the purchase) – your bill is generated every 30 days, and you would have 20-25 days in which to make the payment.
However, if there is a delay of even a day and/or a partial payment, the meter starts ticking. Secondly, if you have a previous outstanding amount, there is no grace period at all, allowing the bank an opportunity to charge you hefty interest on the unpaid amount, impose penalties and levy all sort of fees. This is the credit card issuer’s profit.
The day your bill becomes due, it starts accumulating interest on the unpaid amount. This interest rate is much higher than a regular bank loan, and also the reason it is often quoted on a monthly basis, luring you into making a part payment. Whether or not you pay your bill, the credit card company has to pay your restaurant bill and the vendor you bought your latest mobile phone from.
Yet another reason for revolving credit is a strange one; many users often don’t keep a track of their credit card billing cycle or due date, and when they get an alert from the bank, quickly end up paying only the minimum amount due to avoid late fees, thinking they will pay the balance later, which never happens. Rinse. Repeat.
To put things in perspective, if the
– Amount Due is Rs. 10,000,
– Annual Interest Rate is 40%,
– Payment made is ~ Rs 500 pm or 5% of amount due
It will take you almost 3 years to clear the outstanding dues completely (assuming you make no fresh purchases), besides paying close to Rs 7,000 in interest.
Still wondering why the bank loves it when you don’t pay in full?
So, is revolving credit always bad?
Well, if you know what you are doing, are aware of the high interest rates and penalties, and it is a purchase that just cannot be put off, or an emergency – then revolving might be a necessary evil. However, if you are caught unawares, and get into the habit of using your credit card in this fashion, you will end up in a never-ending debt trap.
You should also keep in mind that defaulting on credit card bills affects your CIBIL credit score which in turn creates a deeper financial hole – lesser availability of credit and loans even when you have a genuine requirement, higher interest rates, and so on.
Download Walnut and save yourself from a debt trap 🙂