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The Credit Card And Personal Loan Debt Trap... 

Don’t let your spending habits define how happy you can be!

(Image: pxhere/BloombergQuint)
(Image: pxhere/BloombergQuint)

Each generation has its quirks and its characteristics that define its era. Ours is a generation where delayed gratification isn’t our strongest trait. We want everything and we want it now.

We are a generation that values its experiences and also its possessions. So, we like to travel and also like to buy stuff. We love to shop and even use this habit as something to kill time with or simply, to make ourselves happy.

All this is possible because we have the means to live today with our future income.

A few months ago, a couple came to me for advice. When I asked about their expenses, they said they weren’t too much. As we got into the specifics, they told me that together they earn Rs 2 lakh and their expenses are about Rs 50,000 a month. However, when I asked them what they have managed to save in the last one year – they said Rs 4 lakh. If that were the case, what has happened to the rest of the Rs 14 lakh, I asked. Bewildered, they replied that they didn’t have a clue.

The culprit: The beloved credit card!
Visa  and Mastercard credit cards are arranged for a photograph. (Photographer: Daniel Acker/Bloomberg)
Visa and Mastercard credit cards are arranged for a photograph. (Photographer: Daniel Acker/Bloomberg)

Indiscriminate Credit Card Use

I have put this question to all my current and prospective clients, and the replies range from a few lakh rupees to almost Rs 80 lakh, in money that was squandered in a span of year or two. What was shocking was that they all seemed surprised and had never realised that they were spending so much!

Unlike earlier generations, many of us are at ease borrowing money, may be even with a bit of pride. With credit cards in our hands, some spend like royalty.

Taking advantage of this weakness, credit card companies offer a ‘minimum amount due’ payment option, which is often a fraction of the amount due. This is a trap.

Card holders pay the minimum amount and continue their habit of borrowing more. Before they realise it, they are pulled into a vicious circle – one that is extremely difficult to get out of.

Meanwhile, there is a sensible way to use your credit card.

  • First, try to budget your expenses, so that you don’t have to use your card unnecessarily.
  • Second, only spend what you can pay off the next month.
  • Third and more importantly, control spending on the card and account it in the relevant expense head. It is very easy to completely lose track of credit card expenses if they are listed but not categorised.

There are four things to remember while using a credit card:

  1. Use it to avail good offers and deals.
  2. Use it to fund your expenses smartly.
  3. Pay the full bill amount, on time.
  4. Never withdraw cash on credit cards.

Personal Loans: Only As Last Resort

Many of us avail loans to pay for large expenses – to buy a home, vehicles, or to finance an education. Some also do so to buy appliances, or to fund a vacation. Loading up on multiple loans is risky, it tightens the EMI noose around our neck.

While there are tax benefits in availing home and education loans, relying on personal loans for discretionary spends, on the other hand, not only comes with a high rate of interest (of 12-16 percent on average), but also can make spending on borrowed money a habit. Many couples take loans to fund their wedding, and some end up overspending. The wedding may have been glamorous, but the marriage suffers as finances come under strain in the effort to repay the debt.

A photographer takes photos of a married couple wearing their wedding attire in an old street in Barcelona. (Photographer: Angel Garcia/Bloomberg)
A photographer takes photos of a married couple wearing their wedding attire in an old street in Barcelona. (Photographer: Angel Garcia/Bloomberg)

Personal loans are the most expensive loans so they must be only used as a last resort. Avail them when there is no other option. When you do, consider the following:

  • Is the requirement for a health-related emergency or something similar?
  • Calculate the expenses fully before applying for the loan.
  • Don’t overspend.

How To Repay Unsecured Debt

As these loans are unsecured and expensive, delayed repayment will attract fees that will correspondingly increase the outstanding loan amount.

Things can get out of hand sooner than you realise.

Put in place a few practices and be disciplined in following them.

  • Automate the payment date within the first week of your salary cycle. This is the easiest way to ensure that you don’t miss out on an EMI payment. This will also ensure that that you don’t take any additional loans to repay that debt or run more amounts on your cards.
  • If there are outstanding loans or EMIs which are unmanageable, cutting down expenses early in the cycle is more helpful than later. If you must live frugally till you are debt free, do so.
  • Whenever you have some extra cash-in-hand use it to pay the loan first.

In a world where everyone is tempting us to spend more money, you need to know where it ends. You must define what you want and what makes you happy. Else, it will get to a stage where no amount of spending will make you happy.

Don’t let your spending habits define how happy you can be!

Shweta Jain is a certified financial planner and the founder of Investography. She is the author of ‘My Conversation With Money’.

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.