Limit your usage

CARD CARE

While banks may offer a good credit limit, look at your salary and needs before spending.

With rising salaries, banks and credit card companies are most likely to increase you credit limit. The easy availability of credit, especially on credit cards, has led to a situation, where most have got used to swiping cards.

However, we always tend to forget that the idea of having a credit line does not mean that you need to use it. Also, it is the wrong way to look at credit just because there is some money available for use. You have to pay it back sometime, and with lots of interest. Delaying repayment only increases the burden to a great extent.

Most banks charge over 30 per cent interest on the outstanding amount, while some charge over 45 per cent a year. In other words, for an outstanding of Rs 1 lakh, you could be coughing up anywhere between Rs 30,000 and Rs 45,000. No wonder, financial planners would say that even before taking a card, it is better that you act as your own policeman. Be cautious about the credit limit being offered. For instance, you might be eligible for Rs 1-lakh limit. Ask yourself the important question: Do I really need it?

While the availability of a higher sum is a good sign, it is not necessary that it should be taken up just because it is there. Similarly, there has to be a constant monitoring of the credit that is being used too so that the potential liability does not extend beyond a certain figure.

In this sense, it is necessary for each individual to fix the amount that one can afford to use on one’s credit card. Your total credit, including other loans, should not go beyond 30-35 per cent of your income. This will ensure that there is not too much pressure on your finances and there is also some control over the payments.

The overall credit that you need depends, besides the income, solely on your spending habits. If you are a “cash-first” person, who incurs most of expenses in cash, the requirement is of a smaller credit limit. On the other hand, if you want to provide some additional amount for a buffer for, say, an emergency hospital expense, then a slightly higher limit will be essential for you.

If you like the feel of card swiping the machine so much that all expenses are incurred with it, then you do need a limit that is considerably higher. But whatever be the situation, it is essential that each individual takes a careful look at one’s own position and then decides the minimum amount of credit limit that is required on one’s credit cards.

But once you have the limit, make efforts right from the time of selection of credit cards to the usage to make sure that you do not get into a debt trap.

Also, if you have a number of cards, you need to look at the situation in its entirety and not piecemeal because the general tendency is to look at the limit spent on one card and say, “Oh, I am not spending on the other, which is already stretched, or I am using one card properly.”

Like the entire credit limit across various cards in your total credit available, the total expenditure also has to be across all the cards. And it is a common situation, where one insulates one card from the other for convenience, when it comes to credit usage. Of course, the final dictum, making payments as much as possible and regularly before the due date ensures lower interest cost and, more importantly, lesser pressure on funds and no headache in the long run.

Disciplined spending is the best way to ensure that there is no overspending on the cards. And that makes life simpler.

The writer is a certified financial planner