With few responsibilities and the new-found power of money and credit card, it's difficult to curb the consumerist urges. You should understand the difference between needs, wants and greed. Credit card is not the only path to debt hell. Here are the various ways you can plunge into liabilities when you start working:
If you roll over credit card dues:
When I started earning, I had a card with a limit of `40,000, but I got so carried away that once I spent `45,000 in a month. That was a wake-up call. I repaid the amount and stopped using the credit card. He hasn't carried out a single credit card transaction in the past six months.
Nayyar, on the other hand, has avoided this situation with discipline and smart usage. I use a mix of credit and debit cards. The credit card is used only to earn and re deem points. He also makes sure to pay the entire bill every month and has never rolled over the due amount.
This is a cardinal rule for credit card usage. Do not roll over the due amount and repay in full because the cards charge a very high interest of nearly 3% a month. So if you get a bill of `10,000 and pay only the minimum due amount of 5%, you will have to pay an extra `21,978 after a year. Fix a spending limit for yourself, say, 20% of your income. But if you can't discipline yourself, use a debit card
There are so many lucrative offers on cards that people don't think twice about taking these up.Avoid buying expensive gadgets on loan even if these comes with 0% interest offers. These will add up and impact your other investments.
If you take too many loans:
The easy option of buying on credit can be your downfall if you do not set limits. Taking a personal loan while running loans for a car and a home can strain your finances, making it difficult to invest or save. As a rule, do not spend more than 40-45% of your income on loan repayments. Of this, 25-35% should be for home loan repayment and the rest for other forms of debt, including car and credit card loan.
If you take personal loan for spending:
Given the ease of securing a personal loan with pre-approved amounts, it is easy to give in to the urge. Know that personal loan is one of the most expensive forms of loan after credit cards and charges 20-24% interest per annum. Avoid these at all cost.
If you buy a house with high EMI: Buying a house is a dream for most new earners, but consider several factors before taking the big decision. Know the difference between fixed and floating rate loans and understand how EMIs are calculated
Understand that the EMIs for a home loan are big and a long-term commitment. So you need to be sure of your earning capacity on a sustained basis, otherwise it will turn into a liability that will impact all your other goals.
If you sign on as a guarantor for a loan:
When you are single and employed and have friends you can't refuse, you can be an easy target for a debt trap. If you sign on as a guarantor for a friend's loan, understand that if he cannot repay the loan, you will be asked to do so. The guarantee amount will show as outstanding liability in your credit card and affect your loan eligibility. So think twice before agreeing to such an arrangement.
If you don't budget:
If you fail to keep track of your expenses on a monthly basis, there is a good chance that you will run out of funds before the month ends. You may then have to consider loans to fulfil your needs.
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