Personal Finance Rule 2 – Pay your credit card bills in full

Person with credit card terminal

This short post reiterates the importance of avoiding an extremely harmful behaviour for your financial health – carrying credit card debt.  This is a companion post to the India version of Harold Pollack’s Index Card – Pollack’s Index Card: All the financial advice that you ever need – India version

Very simple rule – Pay your credit card bills in full, every month

This rule needs very little explanation. The typical interest rate on credit cards is 25 to 35 per cent per annum. Yes, you read it right. Of course, most credit card issuers specify the interest rate in a per month fashion. One of the lowest rates is 1.99 per month, which would come to more than 25% per annum.  One of the most impactful minor change that RBI could do is to compel the issuers to display the annual rate. Since most of us are more familiar with annual rates, this would give a better sense of the enormity or the interest rate.

Put another way, a rate that is close to 35% per annum means that the amount due doubles in a matter of years.  So when you are paying your credit card bills in full, you are in fact preventing yourself from being caught in a vicious cycle of escalating credit card dues.

Is credit card debt a problem in India?

The answer, unfortunately, seems to be yes.  Due to the easy availability of credit cards, and the attractive positioning of them, and of course, the complete ease in using them, a lot of people get into the habit of spending more than they can pay off in a month. As long as the minimum payment is made every month, the credit card issuers are also happy to let the dues build up.  Data on credit card debt is available with industry sources; the information is not often discussed in popular media.  One article from 2016 had this data to share:

“Household debt, as measured by credit outstanding per credit card in India, has been rising both in nominal and real terms (after being adjusted for wholesale price index, or WPI, inflation). In nominal terms, the outstanding per credit card stood at Rs 8,668 as of February 2016, a rise of 15.5% year-on-year…

Incidentally, on an annualised basis, the outstanding number adds up to over Rs 100,000 per annum, higher than the nominal per capita income of around Rs 70,000.”  The reference to this article from Hindustan Times is given at the end of this post.

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