You are swiping your credit card more often than before. Credit card transactions jumped by over 25% in December 2022 in volume and value. Of the total card payments made by volume, two-thirds of them, in terms of value, were using the credit card, according to the monthly statistics put out by the Reserve Bank of India.
Credit cards accounted for half of the transactions in terms of volume for December 2022. That shows that you are using your debit cards for small denomination transactions while swiping your credit cards for high-value transactions. Banks love such customers as they make credit businesses profitable.
Credit cards are a financial tool for people of all income levels if you use them responsibly. They allow you to build a credit record so that banks can later offer you loans based on your credit score. Your ability to service your loans matters to banks. Most banks offer reward points to customers for using their credit cards. These are paid as cashback or points you could redeem for travel, merchandise or other benefits.
So far, so good.
However, there seems to be some skirmish in the credit card rewards programme paradise. A new working paper from the International Monetary Fund published last week reveals a credit card rewards programme in the United States.
It argues that credit card rewards transfer income from less to more educated, from poorer to more affluent and higher to low minority areas in the United States. “We estimate an aggregate annual redistribution of $15 billion from less to more educated, poorer to richer, and high to low minority areas, widening existing disparities,” the IMF paper titled “Who pays for your rewards’ said.
The logic is that banks incentivise reward card members with lower interest rates. While those with a higher repayment capability pay off their outstanding on time, others excited by reward points create higher credit card balances. The behavioural analysis shows that you should use reward credit cards only if you can pay off your outstanding monthly dues. If you roll over credit card outstanding through the revolving monthly credit, banks earn more money.
How to manage your credit card debt
Borrowing for months on your credit card means paying an annual interest rate of 45% or above on your outstanding balance. If you cannot get out of that cycle, take help from your family or friends to pay off the high-interest loan. If that is not possible, you may want to take a personal loan at a fixed interest rate and pay off your credit card bills. You must create a monthly surplus by controlling your expenses if you have a steady income. Do not swipe credit cards for large transactions if you think you cannot pay off the outstanding immediately. There are regular investments you make each month. Those investments make no sense if you have credit card balances, as they cannot generate a 45% plus annual return.
There is a lot to learn from these observations. Your ability to control your expenditure is in your hands. Credit cards are the most accessible tool to use to spend. Banks want you to spend more on their cards. They want to use your weakness for impulse buying to make more interest income. Banks are in the business of making money through you. The onus is entirely on you to manage your finances. If you have credit cards, use them to make payments and earn reward points.
However, ensure that you do not use any revolving credit. If you know about a high-value expenditure early, you should plan for it by setting aside monthly money. You can then use your credit card to purchase and earn the necessary reward points. At the same time, you can pay off your monthly bill. If that is impossible, you must know where and when to stop spending. The rich manage to make the most of these privileges. By overspending, you reward the rich while letting banks earn a higher interest income. That credit card reward in such a situation is anything but rewarding.
Credit cards
You must create a monthly surplus by controlling expenses if you have a steady income. Do not swipe credit cards for large transactions if you think you cannot pay off the outstanding immediately.
Rajas Kelkar
(The author is editor-in-chief at www.moneyminute.in)