Using revolving credit?
If you have a credit card and use it regularly, you might be aware of the concept of ‘Revolving Credit’. Simply put, it is an option whereby you pay only a portion (normally 5%) of your purchases on your credit card. So, for example, if you have purchased some items for Rs.10,000 during the month of January 2007, you can pay just Rs.500 as your next payment.
This is an excellent option if you have a serious cash flow problem or in other words you do not have enough money to pay for your earlier purchases. But there is one small catch!
The balance Rs.9500 will attract an interest rate of 2.95% (or whatever the bank charges) chargeable on a monthly basis. This effectively means that you pay an interest of Rs.288.25 on your outstanding amount of Rs.9500. So if you decide to pay the total amount the next month itself, you will have to pay Rs.9788.25.
If you think it is only Rs.288.25, then I would urge you to consider this. To earn the same amount as interest even at today’s high FD rates, you must invest Rs.9500 in a FD for 3 1/2 months. In effect, you’re putting Rs.9500 in a FD for 3 1/2 months and paying the interest from that investment to pay for one month’s charges on a Rs.9500 outstanding on your card!!!
If you want to tide over a temporary cash crisis of a month at the maximum, you may consider using the Revolving Credit Facility (even then with reluctance) but beyond that and for a period in the short term of 2-3 months, you might start feeling the heat of interest on interest not to talk of other charges.
The Bank which issued the credit card will love you for utlizing the Revolving Credit facility (because that is where they make the money) but if you want to protect your life and your money, settle your outstandings in full by the due date.Â
