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Spending Via Credit Cards: High Interest Rates Demand Caution, Say Experts

Financial experts suggest that before taking a credit card, people should ask themselves and analyse whether they actually need one or not.

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Spending Via Credit Cards: High Interest Rates Demand Caution, Say Experts

Credit cards offer the benefit of cash advances, balance transfer facilities etc.

Using credit cards is often considered to be risky - not just because of the high interest rates but also because people often believe that they lead to overspending, and make them splurge unnecessarily. In fact these days, banks themselves call people to issue 'life-time free' credit cards. The offers are tempting and people often take cards, thinking it is lucrative to get access to money at their disposal, without actually having the money in their accounts. Also, the grace period of 45-50 days, which credit cards offer is another reason that makes people opt for these cards. But one needs to be cautious when applying for a credit card, because he/she may not realise it but it may actually lead them into a debt trap.

Financial experts suggest that before taking a credit card, people should ask themselves and analyse whether they actually need one or not.

Also, these days, there are many e-wallets available. Money transfer through digital platforms is easy. There are many attractive cashback offers available on these platforms. So is it really worth it to have a credit card in today's time?

"A credit card provides you with an option for a short-term credit that can be used in case of emergencies. Also, if credit card balances are paid within the grace period, it helps in building one's credit score, thus leading to future possibilities of getting loans on favorable terms," said Rahul Agarwal, Director Wealth Discovery/EZ Wealth.

Below is a payment schedule for a typical credit card loan:
Suppose you need cash urgently and have withdrawn cash of Rs. 40,000 through your card and plan on paying within 12 months.
Interest Rate per annum: 36%
Interest Rate per month: 3%
Equated Monthly Installments (EMI): Rs 4,019
Processing Fee: Rs 400
Processing Fee + GST: Rs 472
Your loanrepayment Schedule will be as below:
 
MonthStarting Principal BalancePrincipal AmountInterest AmountEMIGSTEMI + GSTEnding Principal Balance
140000281812004019216423537182
237182290311154019201422034278
334278299010284019185420431288
43128830809394019169418828209
52820931728464019152417125036
62503632677514019135415421769
72176933656534019118413718403
8184033466552401999411814937
9149373570448401981410011367
1011367367734140196140807689
117689378823140194240613901
123901390111740192140400
 Total40000822248222148049702 
(as told by Mr Agarwal)

In summary, for a Rs 40,000 loan on a credit card with a payback period of 12 months, you will end up paying a total of Rs 49,000 which includes Rs 9,000 in interest and fees, said Mr Agarwal. "High interest payments prevent repayment of the principal. In other words, the borrower falls in a vicious cycle of re-borrowing, or rolling over money from another source because they are unable to afford the scheduled payments on the principal of a loan."

Credit cards offer the benefit of cash advances, balance transfer facilities, reward points and also increase your purchasing power with the help of monthly installments. However, they should only be used for emergencies and users should not take more cards than needed, experts say.

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