What Should You Consider While Using Credit Cards Or Taking A Loan?

From teaching children the concept of saving small amounts and seeing it grow, to inspiring trust among the vast majority of individuals, especially senior citizens, with guaranteed returns from deposits, to holding borrowers’ hands in their times of need, banking has had a major role to play in the financial lives of individuals.

The banking industry has lived up to its expectations and has been a pathbreaker when it comes to customer interface and convenience by embracing the digital domain. It has adopted new forms of businesses, while maintaining its primary role of accepting deposits and lending.

Bank deposits were among the few investments that Indians made in the 1990s and early 2000s. That was also the time when banks gave handsome returns on deposits—fixed deposits (FDs) gave up to 10-11 per cent in the late 1990s and even higher in the early ’90s over longer tenures. However, FD rates have touched the levels of 9 per cent later, too, during high interest rate phases. In financial year 2023, for example, the Reserve Bank of India (RBI) revised the repo rates multiple times, taking FD rates to the 9 per cent levels for non-senior individuals.

A record number of individuals still go to banks for the safe-keeping of their investments. Even seasoned equity investors trust banks to park their emergency funds.

The lending portfolio of banks has grown by leaps and bounds as borrowing has become a part of our lives. We see more and more younger people buying assets such as cars and houses as against the earlier generation when the house-buying decision was kept for the post-retirement period. The drivers for this trend have been increasing aspirations and softening interest rates compared to previous times. A research paper from RBI cites that lending rates of scheduled commercial banks had reached a peak of 20 per cent in October 1991. “However, with abundant liquidity resulting from large capital flows, interest rates after deregulation showed a distinct downward decline. By October 1997-98, lending rates declined to 14 per cent. Deposit interest rate also softened significantly from 13 per cent per annum (with maturity over three years and up to five years) in 1991-92 to 11.5-12.0 per cent,” the paper said.

Digitalisation, of course, brought in a new era. ATMs had already resulted into decreased footfall in bank branches, and the introduction of phone banking and Netbanking reduced it to a trickle. Payment convenience through modes like Unified Payments Interface (UPI) has further smoothened the road.

The Way Forward

The banking industry has been among the leaders in the financial industry when it comes to embracing digitalisation. The road forward leads to striking a balance between digital and physical banking, which still remains a thing in smaller cities, rural areas and among senior citizens. Bridging that gap through technology would be the next big leap, and that may well get realised as internet penetration increases in India and metaverse and emerging tech expand their scope.

A major part of the banking portfolio is borrowing, so getting it right is the key. Adhil Shetty, CEO and co-founder, Bank Bazaar, tackles issues that matter.

Is It Safe To Use Credit Cards? What Are The Things I Should Keep In Mind?

The safety of credit cards is to be seen primarily in two contexts: financial security and information security. With a credit card, the two are interlinked. If you practice safe credit card habits, there’s nothing to worry about.

First, let’s tackle financial security. Credit cards offer reward points, deals and discounts, cashback, aspirational lifestyle experiences, and no-cost equated monthly instalments (EMIs). These are over and above the interest-free payment window. However, these benefits pay for themselves only when you repay your dues on time. The smartest credit card users do not roll their dues over to the next month. They settle them in full and on time the same month. The typical credit card has a rate of interest of 2-4 per cent per month. If you avoid the late payments and interest charges, your credit score gets better, which makes you eligible for the best loan and credit card offers. On the flip side, late payments can wreck your credit score and make you ineligible for fresh credit, and the compounding interest will create financial stress.  

Next, let’s understand infosecurity. India is one of the safest countries in the world for credit card users, thanks to the measures enabled by RBI. Checks and balances apply in every transaction.

The chances of your credit card being misused by someone else are next to nil. In fact, in most cases, you’d have to do something unsafe to be defrauded.

Consumers can avoid all known forms of credit card fraud. When transacting online, sensitive data—card number, OTP, CVV, and expiry date—needs to be shared only with a reputed merchant or payment gateway via a secure internet connection on a personal computer or phone. Anything else could invite trouble.

When transacting physically, always know where your card is. Let the swipe happen in your presence with PIN authentication. Banks now give you app controls to decide which transactions you want to do and which ones you don’t. For example, a common fraud in the past was unauthorised use of cards from foreign locations. Now, if you’re in India, you could simply switch off international transactions via the app, and just as easily turn them back on if you’re travelling. You can also control how much you want to spend, offline or online, domestically or internationally, on the main card or the add-on card.

In addition, you have the levers of your financial safety and information security in your hands. So, understand them and use them responsibly to get the best out of your credit card.

What’s The Best Way To Maintain A Good Credit Score?

Adhil Shetty  |  CEO and co-founder, BankBazaar.com

A good credit score plays several roles in your financial life. First, a good credit score—that’s anything above 750—helps you get the best loan and credit card offers where interest rates offered to you are better compared to someone with a lower score. On the flipside, a weak credit score makes all the above costlier to fulfil.

Second, your credit report gives you a monthly snapshot of the impact of your credit use on your score. For instance, if you were late on EMIs or credit card payments, applying for too many credit lines at once, or maxing out your credit, there would almost certainly be a negative impact on your score.

A good credit score doesn’t require an Oppenheimerian level of calculation. Let’s focus on five basics points.

One: Pay your dues in full and on time. The dues can be from three kinds of credit relationships: your own loans and credit cards, those you co-own with others (such as a home loan, or an add-on card for your spouse), and those you’re a financial guarantor to. If payments are late in any of these cases, your credit score will fall.

Two: Avoid paying the minimum amount due (MAD) on your credit card. If your MAD is 5 per cent and the rate of interest is 4 per cent, you are effectively paying back only 1 per cent of your dues. The longer you keep on paying only MAD, the more your interest compounds, and the more your spending limit gets used up. This lowers your credit score. Therefore, ideally do not go over 30 per cent of your spending limit, and don’t forget the first point: pay back in full.

Three: Avoid making too many loan or credit card applications in a short span of time. Each credit application leads to the lender checking your credit score, and each such check lowers your score marginally. Go online, do your research, understand your eligibility, and thoughtfully apply for credit, one product at a time.

Four: Use your credit card. You cannot have a credit history without credit, and a good credit history will help you get good loan offers when you are in the market for any loan.

Five: Keep an eye on your credit score. A monthly free check doesn’t hurt your score. It will help you understand how your credit use impacts your score. It will also help you spot problems and errors to fix in your credit history.

When Is A Good Time To Borrow? Should I Postpone It As Interest Rates Are Rising?

Should I Bundle Loans With Insurance?

Insurance is useful. Policies cross-sold with home loans typically cover life, fire and perils. But even job loss protection plans could come in handy as they could help pay a few EMIs. Consumers need to do two things here. One: evaluate the insurance plans on their own merits and demerits. Two: ask themselves how they would protect themselves against risks, such as their untimely death. After all, if they were to pass away and their families are not able to continue the EMIs, the home would be repossessed and auctioned by the lender.

If there are significant risks, consumers can decide if they want to purchase insurance from the lender or on their own from the retail insurance market. As prices, features, benefits, and exclusions may vary, consumers should choose what’s best for them.

However, what consumers shouldn’t do is be forced to buy something they don’t need. There’s often the misconception that you must absolutely buy a loan protection plan or home insurance when you take a home loan. But this isn’t true and the RBI also prohibits it. Some lenders may also incentivise this cross-sale by giving borrowers a discount of 5-10 basis points on the interest rate. But, finally, it’s the borrower’s call. They may choose not to buy it or could simply buy adequate term insurance from their preferred insurer to protect their families against the burden of liability arising out of uncertain risks.

Loan protection plans work different from typical term plans. There may be a reducing sum assured tied to a reducing loan balance. If the loan is pre-closed, the policy serves no further purpose such as providing dependents a sum assured if the borrower passes away after the loan closure. On the other hand, a term plan will remain in force for the entire period you have purchased it for if you choose so.

I Have A Few Loans And I Am Unable To Pay Any Of Them? How Should I Tackle The Situation To Get Rid Of Debt?

A  debt spiral requires a multi-pronged, proactive approach without which you’ll be pulled deeper into debt. While it will be challenging, you must develop the intent to pay off these loans in full. If you default, settle, or delay, your credit history will suffer and make it difficult for you to borrow in the future.

Start by speaking to a debt counsellor. Loan-related stress is common in India. Professional advice will help you start off your repayment journey strongly by helping you avoid obvious mistakes, such as taking even more loans. Needless to say, further borrowing needs to stop before you sort out the mess you are currently in.

Don’t try to evade your lenders. Have a dialogue with them. They may provide you options that may help. Restructuring, moratoria, refinancing to lower rates, and consolidation of multiple high-interest loans into a single low-interest loan are some of the options you can ask for. Your lenders may not necessarily agree to all these ideas, but it’s important to ask what’s possible. Avoid loan settlements since they will remain on your record and damage your credit score. At the same time, know that your lender may be bound by RBI’s code of conduct and cannot harass you for recovery. Read up on the rights of borrowers to be treated ethically.

Understand the nature of each loan and its applicable charges. You must also ensure that your EMIs are continuing in a timely manner, else your interest and penalties will compound and pull you deeper into debt. There are two methods you can refer to: the avalanche method and the snowball method. In the first, you prioritise debts by interest rates. For instance, credit card dues have the highest rates of interest. Attacking high-rate debt first helps you save interest down the road. In the second method, you attack the smallest debts first regardless of their rates, and move on to bigger ones, thus building momentum with small steps as you tick off one small loan after another.

Lastly, you’ll need to live frugally till your debts are settled. Find funds to pay off your dues. This will happen through a combination of cutting down on your expenses, increasing your income sources, or liquidating an asset to raise cash. If you generate additional income, prioritise loan payments over expenditure. It’s your financial, legal, and moral obligation to repay what you have borrowed. And while a debt spiral can be overwhelming, positive intent helps. Plan your next steps, celebrate small victories, and keep going till you are out of debt.

Vijay Legha in 2009 (Left) and in 2023. Photo: Photo: Bhupinder Singh, Photo: Vikram Sharma

Then And Now

Vijay Legha

Vijay Legha, 40, who works at a Delhi-based multinational company, and belongs to Bikaner in Rajasthan, is among the handful of people who start investing early. He learned to make his “money work for him” early on and kept increasing his investment each year, which has benefitted him immensely.

When he was featured in Outlook Money in December 2009 as a 26-year-old single, he was investing in mutual funds, gold funds, Public Provident Fund (PPF), and Voluntary Provident Fund (VPF).

After he got married, Vijay diversified into tax-saving mutual funds, exchange-traded funds (ETFs), bank deposits and other small savings schemes such as Sukanya Samriddhi Yojana for his two daughters.

He also began investing in precious metals during Diwali or Holi. In fact, he saw the potential in gold and silver, which he thought were becoming an important alternative to the dollar.

He says he has earned more than 10 times what he invested in gold funds, mutual funds, and other financial products, such as unit-linked insurance plans (Ulips).

Vijay also invests time with his family and indulges in holidays. He says the key to his wealth building has been the Think, Plan and Execute strategy. “Always believe in investing in various financial products available in the markets to avoid the possibility of risk,” he says.