Financial Planning Part 4: How To Manage Debt And Use Credit Cards Wisely
In the final article of our expert series on financial planning for women, we share expert tips on how to manage debt and use credit cards wisely.
In Part 1, Part 2 & Part 3 of this series on financial planning, we shared expert financial advice and tips to save money and listed a number of investment planning options to help you invest money to meet your financial goals.
In the final article of our expert series on creating financial independence, we share expert answers on how to manage debt wisely from experts like Mrin Agarwal, Shipra Baranwal, and Dipika Jaikishan.
Shipra Baranwal is the Co-founder of LiveFromALounge and also runs the PointsPurse community where she runs personal finance and credit card workshops exclusively for women.
Mrin Agarwal, is the Founder of FinsafeIndia, Co-founder of Womantra and a licensed financial advisor, financial coach, and personal finance columnist.
Dipika Jaikishan is on a mission to make every woman in India financially independent.
How to reduce debt
There are different forms of debt and, as Dipika explains, “Good debt is in my opinion stuff that may not give you instant gratification. Bad debt can be credit cards that have been unpaid - personal loans etc.”
“Good debt can be healthy for your long term financial future and is a current liability that will have long-term benefits, for instance, an education loan or a home loan. While now there is a cost to it, there is a pay-off in the long term.”
“Luxury Vs essential depends from person to person,” says Mrin. “You would be best judge to know what’s an essential expense and not essential. Remember, the higher your debt, the lower would be your credit score and this would impact your loan eligibility in the future.”
- You can reduce your debt by firstly cutting down on non-essential expenses like eating out, subscriptions to channels you don’t watch much, etc. The amount saved should be used to lower any debts or loans that you have taken.
- Keep an expense tracker wherein you note down your expenses. At the end of the month, when you check you will realise how much you’re spending on non-essential expenses.
- Start an investment like SIP or PPF where you set auto instructions to debit your account. This will force you to first save and then you would be left with only remaining amount to spend.
- Do not spend beyond credit limit on your credit cards and pay the full amount due on your credit card always.
“Every Rs 500 or 1000 that you invest wisely instead of spending on an impulse can make a difference, says Dipika. “One thing you can do is that for every purchase you make, invest an equal amount for yourself. That way you will realise which expenditure is actually giving you a benefit for the future.”
How to use credit cards & points wisely
In her session on How To Use Credit Cards & Points Smartly, Shipra Baranwal gave the following advice.
A credit score is an absolute number between 300 and 900 and a good credit score is usually 750 and above. For people who default on their credit card bills the credit score takes a hit as it indicates a bad repayment track record.
However, if you pay your credit card bills on time, you can improve your credit scores quickly as it indicates to the bank that you are financially disciplined. Your credit score is calculated based on:
- Your total available credit balance
- Your repayment track record
- Balance between your secured and unsecured loans
- Number of loans and credit cards you have
- Credit utilization
Credit cards can help improve your credit score, in the sense that they show your financial discipline of repaying your bank on time, therefore a good repayment track record.
Financial discipline is very important when spending cash or swiping credit cards. Paying bills on time is an absolute must otherwise the penalty is enormous. You can pay your credit card bill via bank transfer, NEFT or via Wallets.
One way that I ensure I don’t overspend on my credit card is that for every spend of more than 5000 rupees I transfer the money to my card account the next day. This keeps me in check.
Also, you can optimise your credit card if you use it like an expense management tool, and not view it as a shopping plastic, because ultimately you have to pay the bill.
You should always know your credit limit on your card and spend within that limit. If you spend over your credit limit banks may block the card temporarily or charge an over-limit penalty.
Based on your credit history you can always ask the banks to increase your credit limit. For example, a few months before my wedding, I contacted my credit card issuing bank and got my credit limit increased for high-value purchases.
There are many free credit cards in the market. Though keep in mind that it's always a good idea to pay a small fee for your credit card as the rewards are much better than any free credit card. You can get a good credit card for as low as 1000 rupees annual fee.
There are many benefits of using a credit card over a debit card, such as:
- You get a 30-50 days free credit period
- It saves money. I have saved almost a lakh through cash backs and discounts.
- You can earn rewards which debit card won't allow you to.
- They are a secure method of payment since they offer Purchase Protection
- They help you build your credit score.
It's always important to know what kind of reward you want to earn on your credit card spend, for example, cashback, Payback Points, air miles, and if that credit card fulfills it, you can choose to use them.
Each credit card offers different types of reward points that can be used to make retail purchases, buy fuel, and even get free flights and hotel stays. There are credit cards that allow you earn reward points that you can redeem for free fuel.
One such example is the CitiBank Indian Oil credit card where you can earn 4 reward points for every 100 rupees spent at fueling station and then you can use these points at 1 rupee value at Indian oil fuel pumps.
So essentially, if you earn 1000 points, you can redeem them for fuel worth 1000 rupees. Credit card companies offer all way from cash backs to Payback points to Reward Points with monetary value to air miles for the spends we make.
Personally, I like earning air miles and travel points on all my credit cards. It helps me and my family save money on travel. I have a credit card that earns me a free Business Class flight ticket for every time I spend 2.5 lakhs on the card.
I have other cards that earn me air miles and hotel points. Essentially, I try and earn travel points on my credit cards through everyday spends and then save money on travel.
One year I earned 54,000 air miles just by putting my groceries and other home expenses on my credit card. That's good enough to get me a flight to London!
Read this article to learn how I shifted from using debit cards to credit cards and how my credit card points have helped me travel to 13 countries almost free.
Travel credit cards give one of the 3 types of benefits:
- Fixed points
- Transferable points that can be moved to air miles and hotels
- Co-branded cards that offer privileges with specific airlines
For high value purchases, it's a good idea to maximize your free credit period on the card and if you have financial discipline, you can really optimize your credit card rewards.
My first tip to anyone wanting a credit card is don't allow anyone else to decide what credit card your should keep in your wallet.
Agents never tell you Terms & Conditions that are a must and also the reward points you will earn. They usually, say it's a free credit card and you should have it. That's not enough!
Today this information is easily available on the web, so before applying for any credit card, you should know a few things:
- Am I willing to pay an annual fee?
- What do I want to earn in return for my spends?
- What is the value of reward points earned?
- Will my reward points expire?
- What is the late payment fee & finance charge on the card?
- Any other benefits that credit card can get you complimentary (airport spa, lounge, extra baggage, free flights etc)?
For expensive or high value purchase on your credit card you may want to convert it into EMI and pay in smaller monthly installments. For example, when I bought my iPhone 2 years ago, I converted the amount into 18 months EMI on my credit card.
Again, I do not propagate over-spending on credit cards and falling into the debt trap. My advice is to not consider taking any personal loan on your credit card. The interest rates are very high as they are not charged on a per annum basis but per month.
Mrin agrees. “It is better to save and then buy, especially in uncertain times. Try to stay away from personal loans, especially for not so essential expenses,” she says.
If you lose your credit card, you should immediately contact the bank or the credit card company and block the card. If someone has misused your card, you can also dispute the charge and banks will refund the amount.
Taking business loans for women
You can apply to Mahila Money for a business loan or get a Bharatiya Mahila Business Loan. You can also check for MUDRA or small business credit. Check with your bank or other small business finance bank.
Also read:
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14 Oct 2014
