Investing Handbook for Indians: Chapter 4

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The Money Matter

8 min readAug 31, 2021

Understanding credit cards

I have been eager to write this piece more than ever. I believe this one will be able to give you some easy to implement steps to be in the credit game. My aim here is to raise awareness of good credit and point out the types of actions and patterns that makes consumers ‘go broke’. I hope you enjoy reading this chapter as much as I have enjoyed carving it.

Credit cards: The most profitable product in the debt business.

Learning the Basics.

A credit card is a payment card issued by banks or NBFCs to users to enable the cardholder to pay a merchant for goods and services without touching their own money. You can use the card for all your online and offline transactions. The credit card company then generates a monthly bill for you which you are supposed to payoff the bill on/before the due date. Sounds fair and simple.

Let’s understand some key terms associated with credit. We’ll consider ourselves a customer using a credit card issued by this bank ‘A’.

Credit Limit: The highest amount that Bank A allows you to spend.
Annual Charges: An annual charge for using the credit card.
Joining Fees: A one time payment charged for issuing the credit card.
Bill Amount: The total amount you owe Bank A for credit usage for the month.
Billing Cycle: The date on which your credit card bill is generated.
Due Date: Date of the month until which you can pay your credit bill without any penalty. Generally this is a 15 day period from the bill generation date.
Minimum Payable Amount: Your generated credit card bill comes with two numbers. One is the total bill amount for the amount. Another is the minimum amount you can pay against the generated bill, so that Bank A lets you continue using their credit card. This is a very interesting spiral & the source of money for Bank A’s credit business. More on this later.
Interest rates: Credit card issuers in India charge you interest rates somewhere in the range of 3–5% monthly. Mind you, we said the charges are monthly. This implies that interest rates on credit cards are anywhere north of 35–40% per annum.
Late Payment Fees: The credit card company will charge you a penalty amount if you do not pay at least the minimum payable amount by the credit bill due date. You will find the exact numbers under ‘other fees and charges’ on your credit card.
Cash Limit: You can withdraw cash from any ATM machine using your credit card as well. The is amount is quite small, usually between 5–10k. Quite a handy option but there are extra charges you have to pay for drawing cash and the amount is quite big. Again, you should find the details under ‘other fees and charges’.

How to get a credit card?

Well, before you can think of using a credit card, it is already made available to you. If not, you can reach your bank of choice and request for a credit card be issued for you. Your KYC will be done and in no time the card will be ready to use.
I have seen cases and this is very common now more than ever where the card is instantly made available digitally. After which, it takes 1–2 weeks to ship the physical card to your address of correspondence.
They want to onboard you ASAP. FOMO much 😝

You are issued a credit card based on answers to one or both of these two questions:

Are you credit worthy?
The credit card org runs a check through your credit history i.e. any previous loans and how timely you paid off the EMIs etc. To simplify, they check your credit score and if they like what they see, in no time you get a call from one of their reps offering you a card.
Do you earn/hold enough money to pay off debt?
Checking your monthly/annual cashflow. This comes into picture if you do not have a credit history viz. credit score to vouch on your behalf. Credit companies will check your income tax reports and understand if the cashflow(money coming in and going out) will allow you to afford the credit amount or not.

How does the payment process work?

The payment process is as clear as day if you are a customer who pays off the entire amount due by the on or before the last date.

The process becomes slightly complicated when you don’t.

There are 2 cases that may arise now:

You pay only the minimum due amount.
The credit card company will start charging you monthly interest rates as high as 40% per annum & GST on the total amount outstanding.
For unseen reasons, you do not pay at all.
You are liable to pay these extremely high interest rates on the due amount, a fee for not paying your credit bill & GST as earlier.

Should you opt for a credit card?

Making a decision always calls for a pro-con list. Let me rather list them all together and you are wise enough to decide what will act for/against your particular situation.

Using credit is a good option when you do not have a big chunk handy.
It is always better to pay the same amount after a month rather than losing the money upfront. The longer I have my money, the more I can use it for to invest.
You need not carry physical cash with you at all times
In case of a fraud, it is not your money that will be at stake. You can report the fraud and it is the bank’s responsibility to track the transaction and press charges whenever needed.
The rewards points and cashback schemes need no mention.
Based on the type of card you are picking, you become eligible to extra discounts and vouchers for a vast range of products and services
You might enter into the habit of spending without accounting for your paying back capacity.
Not being able to pay your credit card bills make you liable to heavy charges.
Credit card rewards systems are a psychological bait. The more you spend more higher are the rewards you earn. It keeps commerce fueled.
You can withdraw cash if there is an emergency.

The HOAX called Minimum Amount Due

The term is quite misleading. I have often seen people being at peace after paying this smaller amount thinking this is the way they are avoiding defaulter charges.
We will do some math.
Credit card bill: Rs. 36,000/-
Interest rate: 36% p.a. which is 3% per month
Minimum amount due: Rs.3,000/-

Person Z decides to pay only the minimum.
Outstanding for the month is Rs. 33,000/-
3% of 33,000 is Rs. 900/-

Net due = Rs. 33,000/- + Rs. 900/- = Rs. 33,900/-

Now, you continue the same for the next month’s bill as well. You spent some Rs. 20,000/- this time. (cut down on expenses because you’re indebt already)

Outstanding for the month = Previous month’s due + Current month’s usage
Outstanding for the month = Rs. 33,900/- + Rs. 20,000/- = Rs. 53,900/-
Minimum amount due: Rs.5,000/- (you paid this)
Net due = Rs. 48,900/- + Rs. 1,440/- = Rs. 50,340/-

Let’s summarize:
Amount spent = Rs. 36,000/- + Rs. 20,000/- = Rs. 56,000/-
Amount you are paying = Rs. 50,340/- + Rs.5,000/- + Rs.3,000/
= Rs. 58,340/-
All this in a period of 60 days.
Put the same Rs. 56,000/- in an average 10% return instrument and you would have gained Rs. 5,600/- after 365 days.

Did you see that? 😱

Effectively using credit

We will note some pointers that will help us reap the benefits of credit while preventing the same cards from ripping our finances.

Here are some simple steps and pointers to abide by. Personally, this has helped my money simplify life drastically.

Note the day of the month your credit card(s) bill gets generated.
Spend only what you can pay off in the near future without going into more debt.
Use your card wherever acceptable to avoid spending money from your pockets. Also, the most you use the card, the more rewards you will earn.
Keep an eye for no cost emi options on your credit card when making big purchases.
Make it a habit to check your credit card transaction statement periodically.( I do it every Saturday). Report any suspicious transaction. Also, it acts as a personal check on your spendings.
Try paying off the credit bill 5–7days before the last day so you don’t miss it and end up paying late charges.
If it’s an absolutely terrible month for your finances, make sure you pay the minimum due amount without fail. (don’t make this a habit though)
Avoid sharing credit cards even within your family or between couples. The spending and payment habits of the entire group will impact the credit score of the card holder.
Having a good credit score will come in handy. Maintain one.
When picking a card try to opt for the ones with zero annual charges. You can avoid bearing this recurring charge.

The facts and fads

You do not need to have a credit score to get a loan.
By paying only the minimum due amount on your credit bill, you are enrolling yourself into an endless cash drain.
Credit cards are not pure evil
Credit cards give you more rewards than debit.
An increase in credit limit does not mean you should scale up your spending
Holding multiple credit cards vs only one card does not make much difference unless your spending habits are spiralling towards bankruptcy. Keeping 2 or 3 cards max makes things better manageable.
Most credit cards make you eligible for No Cost EMI options. Do not miss out on those.
If you are a business that accepts credit cards as a mode of payment, you will have to give the credit company a small cut for every payment you receive via credit swipes.
Every credit card comes favors a specific utility (ex: shopping, fuel, travel etc.). Choose what fits you best to get the most rewards and discounts.

I am so glad we have made it this far. Thank you for your patience & time.
Stay tuned with The Money Matter & hit the Follow button to get notified about our upcoming chapters.

If you haven’t already read the previous chapters, find them here: