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How you can avoid the debt cycle: Pay on time, don’t exhaust your credit limit

Getting a credit card is only one part of the story. Once you get it, you should know how to avoid late payment and interest charges. In fact, interest charges are the highest for credit cards, compared to other loan products. (Bloomberg)

Mumbai-based Abhay Patade, 28, manager at Asian Paints Ltd, took a credit card three months ago to streamline his expenses and savings. “After my salary gets credited, I first set aside 40-45% for my savings. The remaining goes into my rent and other household expenses. Along with that I was paying off a loan from a friend. All this led to a heavy money crunch during month-ends,” said Patade. Once he got the credit card, Patade shifted his debit card expenses to his credit card and paid off his bills on time. “My credit card limit is Rs. 4 lakh and I use only 8-10% of that for expenses such as food, shopping, bills and lifestyle needs,” he said. Now Patade has shifted 45-50% of his expenses to credit card. In order to maximise the usage, he has changed his expense pattern so that he can fully utilise the grace period where if you spend and pay the bill on time, you don’t have to pay any cost.

Like Patade, 39-year-old Priti Katkar from Mumbai, who is currently on a break from her teaching career to take care of her children, applied for a credit card when she couldn’t manage her increasing expenses. “We applied for the credit card three years ago. We were running short of money,” said Katkar, who currently has two credit cards – a fuel card and a cinema/shopping credit card. It is not that she didn’t have investment. She invested in mutual funds, equities and public provident fund. However, she used the credit cards for the liquidity it offered and the reward points feature made her shift to card from cash. Every month she ends up using 60-70% of her total credit card limit for 40-50% of her total monthly expenses. The limit for her fuel credit card is 1 lakh and the shopping credit card is 85,000. Katkar also has never defaulted on her payments.

However, in case she doesn’t have sufficient funds, she converts transactions into EMI payment. But remember that EMI attracts charges.