Credit cards are not evil; just understand the maths to use it smartly

I am sure that I am not alone when I say that credit cards are extremely useful. But now and then, they do get a bad name when misused by a few.

Is credit cards evil?

Not at all.

Credit cards can make people spend more than they should. The problem with the card is not the card itself.

I talked to a cousin who said that he had seven credit cards. I asked if he used them for both purposes.

I was surprised to hear that he was using them recklessly. He couldn't clear off the full dues because he was overspending. He paid the minimum due a few times but didn't pay the full amount.

This is not new. The problem is not the card. People don't understand the real devil.

And that is – the extremely high interest rates of credit cards.

You can tame it if you understand the math behind it.

Don't be Mad; just pay the money.

The minimum amount due is called MAD in credit card terminology. The minimum amount you need to pay before the due date is what keeps your card account regular. The late payment fee and negative impact on your credit score can be avoided by paying the minimum amount.

You have to pay interest on the outstanding. Most of you know that interest on credit cards can be 40% per annum.

Let's use a very simple example to understand this better.

You have a credit card that has an outstanding amount of Rs 30,000. The minimum amount due is Rs 1,500.

What are your options?

1. You can pay the full due of Rs 30,000 before the due date2. You can pay just the Minimum Amount Due of Rs 1,500 before the due date

3. You pay nothing if you choose this option.

Here is what happens in each case.

1. No interest is to be paid as you cleared all the dues and there are no outstanding on the due date

2. There will be an interest of Rs 28,500 for the month.

3. The full Rs 30,000 will be charged with interest. You will be charged a late fee if you failed to pay the minimum amount due.

Paying the minimum amount due is not enough for cardholders. It is not. It is not. The late payment fee is avoided that way. You will be charged high interest on the outstanding amount.

That's not all.

If you don't pay the card in full, you won't get the interest-free credit period for later transactions. Credit card users are killed financially by this.

Continue with the earlier example.

If you get a bill of Rs 30,000, you only have to pay the minimum of Rs 1,500. Rs 28,500 is outstanding.

If you spend more than Rs 15,000 after the due date, you will not get a one-day interest-free period. You will be charged interest on the first day after the transaction, not the next bill's due date.

You get charged more interest on the original outstanding and the new spend.

Is there a way to get around this?

My primary suggestion would be never to get into hacks like revolving credit card usage, maintaining multiple cards, etc., in order to get longer interest-free periods that many influencers promote these days. Instead, keep things simple and make sure you pay the card bills in full. Not just the minimum due or even one rupee less than the bill amount. If you find it tough to control the urge to spend, then cut the use of cards. Try following simple rules like ‘If unable to afford to buy something in cash, then I will not buy it using my credit card’ OR use your credit card like your debit card. Spend only what you can clear off immediately.

You can download your money calendar here and keep your dates with your moneybox.