Credit card debt is a black-hole that can leave your financial planning in disarray.
What is the most simplest and convenient way for the youth of today to shop ? Credit cards of course. It’s a different story that while swiping the card is a one minute job, paying off credit card debt could be a lifetime affair. Yes, that is true.
If you were to calculate how much time you would need to clear off your credit card debt, you would be shocked. Let us see an example why you should avoid credit card debt.
Credit card interest rates
The interest rates on credit cards are around 2.95% per month. This translates into 41.74% per annum. If you add in the service tax, the interest rate per annum comes to around 48%.
That is a mind-boggling figure. If you prefer to pay only the minimum due each month (around 5%), the costs of paying off the principal will only sky-rocket.
Credit Card companies give 52 days of free credit to be used, however, uninformed users seldom use that intelligently.
By Salvatore Vuono from freedigitalphotos.net
Example
If you were to purchase a gadget worth Rs 1,00,000/- on your credit card and then pay a minimum due each month, which is 5%, then the below table tells you how much your balance will be at the end of one year.
Now since the credit card company has allowed you to purchase your favorite gadget without you having the money to pay it off immediately, it’s going to ask you to pay a bit more – this is called the interest component. So despite having paid Rs 56,808/- in twelve months (a bit more than 50% of the gadget value you bought), you still have an outstanding loan of Rs 88,638!
Your interest component is already a whopping Rs 45, 446. Now you know why your credit card company would love to have you roll your credit rather than pay off your credit card debt.
| Month | Minimum due (A) | Interest (B) | Balance (C) |
| 1 | 5,000 | 4,000 | 99,000 |
| 2 | 4,950 | 3,960 | 98,010 |
| 3 | 4,901 | 3,920 | 97,030 |
| 4 | 4,851 | 3,881 | 96,060 |
| 5 | 4,803 | 3,842 | 95,099 |
| 6 | 4,755 | 3,804 | 94,148 |
| 7 | 4,707 | 3,766 | 93,207 |
| 8 | 4,660 | 3,728 | 92,274 |
| 9 | 4,614 | 3,691 | 91,352 |
| 10 | 4,568 | 3,654 | 90,438 |
| 11 | 4,522 | 3,618 | 89,534 |
| 12 | 4,477 | 3,581 | 88,638 |
| 56,808 | 45,446 |
A is the Minimum due, 5% of C, the Balance. So for the first month, 5% of Rs 1,00,000 is Rs 5,000/-. For the second month, 5% of Rs 99,000 (C) is Rs 4,950/-. To calculate the interest component (B), 48% per annum translates to 48%/12 of Rs 1,00,000/- = Rs 4,000 (B) for first month. For the second month, 48%/12 of Rs 99,000 (C) = Rs 3,960/- (b).
Interest rates on other types of loans
Compare this loan with the other types of loans available in the market today and you will see the difference.
| Type of Loans | Approx. Interest Rate (%) |
| Home Loan | 8% – 12% |
| Car Loan | 15% |
| Consumer Durable Loan | 16 – 18% |
| Personal Loan | 18 – 20% |
| Credit Card Loan | 48% |
So remember that though paying the minimum due on your credit card looks like a short-term solution, in the long run you would be losing your shirt. Pay off your credit card debt before the due date.
Somehow I doubting the calculation, I feel some small mistake though not sure…..
Also I think the interest (B) for first month should not be counted. I personally payed amout late by 3-4 months, I used to count and have never been charged so much :).
@Chirag, Can you calculate at your end and let me know what the mistake is ?
Great post! I’ve also noticed a huge craze in Facebook quotes, there were a few sites that would get millions of likes just on a single quote.
Hi,
I was actually planning to embark on getting a credit card.I just want it to be there in case i run out of money towards the end of the month.
Si i wont be using it on a weekly basis or anything.
Could you please recommend a suitable credit card which has these features:
– Easy to calculate (Transparent)
– One that i can get rid of if i don’t need it anymore without getting hassled by the bank.
– One that is best suited for one or two transactions a month.
Thank you so much, hope to hear from you!
Hemant – your reason of having a credit card is wrong. You cannot have it and use it if you run out of money towards the month end. As you can see from the article above, the debt increases massively.
If you need money then use your contingency fund – wait, before that you need to form it, don’t you !
By the way, each of your requirements of the credit card can be met by any card you pick up. So you can opt from either SBI, HDFC, ICICI or anyone for that matter.
Use it judiciously – all the best !
@Hemant,
If you plan out properly you can make very good use of your credit card. For eg. if my credit card billing cycle is 5th every month and i get credit for 45 days. So i start doing my grocery shopping, etc after 6th and i get a good amount of credit for the same. But make sure to make full-payment before due date.
As Radhey suggested use your credit card wisely.
hey if i want to buy a laptop online in emis should i get a credit card or not?
What things should i keep in mind before doing this????