May 11, 2010
Year 2002. New world, new environment. Just out of college and full of energy. Finding a job was a herculean task, but what proved easier was obtaining a credit card. The day I joined the new company, with the salary bank account came an application for credit card. Like an unsuspecting victim, I signed the credit card application form. And that was the beginning of what I call ‘my financial misery.’
Believe me, even before my salary could get credited, I had a card loaded with a credit limit of more than 2 times my monthly salary. Wow! Amazing! I thought. All that was required was a simple swipe and a signature. (Did not matter whether it was yours!). And what would you do with all the free money? (Can’t believe I thought so!) Spend it!
I was rather conservative when it came to spending, but this tiny 3’ 2 plastic card changed it all. The spendthrift in me woke up and before I could ponder, I had a swanky Nokia 3530 around my neck with MP3 ringtones often showing it off to my friends and colleagues, albeit with a little liability on me. It did not stop there. The credit card paved way towards satisfying my needs beyond control. Branded clothes, watches, shoes were the things that followed. The credit card had given a whole new dimension to my spending. Little did I realize that the plastic would create a persistent shadow of mounting debt that would detrimentally affect several years of my career!
By the end of my first two year in job I casually had a look at my spending and saving graph which showed a drastic result. The spending graph showed its arrow pointing northwards while I maintained the credit card just paying minimum amount due of 5% on the outstanding of the card. That was a huge mistake, I realise! The outstanding on my card remained still the same though I had been paying regularly. For the bank I was the perfect customer, who paid on time and paid them a good interest rate. They had made a very good decision.
“This is it,” I said to myself and my perspective on credit cards changed that day onwards. My savings were not more than zero and my spending were far exceeding what I could actually afford. The main culprit, you are right, was my credit card. The hefty interest charges coupled with overlimit charges, late payment fees etc had ballooned to such an extent that I thought of seeking a debt counselor.
Well, I did not do so.
- I made a pact with myself. And here is how I solved my debt crisis. (You can too!)
- I locked my credit card in a locker never to use it again except for booking airline ticket. (Here again, I cleared the outstanding the very next month. Or else I would end up paying a higher ticket price if interest on purchase is added)
- I made sure that I pay at least 25% of the outstanding till I paid everything that was outstanding on my credit card.
- Set up a direct debit on the bank account so that I do need to remember the dates of repayment.
- Control spending and unnecessary purchases. Make a clear distinction between ‘need to have’ and ‘nice to have’ things. Be a disciplined buyer. Think ‘thrice’ before you swipe a credit card.
- Once the outstanding is settled, in future if there are any outstanding to be settled, settle it as and when they are due. Do not carry forward the balances to the coming months. Certain banks charge interest on the whole purchase from the date of transaction and not only on outstanding
- Use debit card as much as possible. (You need to have money in your bank account for this!) Spend what you have. Do not spend money using credit card even if you expect a future cash inflows.
- Do not subscribe to new credit card unless the need is absolute. Remember temptations can sometimes put you in trouble.
Make a budget. You might think you don't need a budget, but that's probably why I was in debt. Make a budget. Put a name to every Rupee/Dirham. Have a plan for spending each Rupee/Dirham before spending. This is the key. Well, these are the strategies that I adopt(ed) and were helpful to me. If you have any other strategies please comment, so that they will be useful for others.
The financial crisis has taught all of us a vital lesson when it comes to saving and spending habits. Who were once reckless spenders have learnt it the hard way, and those who were prudent in their spending habits have appreciated themselves for being so. You need not be a financial pundit to understand these simple lessons. Credit cards are like double edged swords. Unless you use them wisely, they can be dangerous. They are not a vice if used in a disciplined way. If you are clever enough, credit cards could be used in such a way that you reap good rewards through various discounts, skymiles-which could be used for various purchases, coupons which carry great offers. But then again you need to realise that credit cards promote spending.
The truth about credit cards is that while they make our lives much more convenient, they also make our lives more expensive. Take control of your credit card and don't let it control you.
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