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Credit Cards offer convenience as they allow cardholders to “buy now, pay later”. Credit Cards allow the cardholder to swipe and make payment for all kinds of goods and services as they are widely accepted by merchant establishments. In case of an emergency, the card holder can also withdraw cash.  It is extremely convenient to carry our purchasing power in our pocket in the form of a plastic card. It also facilitates payment of minimum amount due at the end of the billing cycle (typically a month). No wonder credit card is the most preferred product amongst employees because of its convenience and accessibility. Professionals consider them to be a status symbol and would flash their cards at the drop of a hat. Even corporates offer these cards to their employees to meet business expenses related to purchases, entertainment, and travel. Credit Cards make the cardholder an impulsive buyer and the tendency is to spend more than required while owning a card. A statement is sent every month at the end of the billing cycle, where a cardholder is given a choice to pay either the total/minimum amount due. 

Initially, everybody wish to pay off everything in full when the sign for the credit card (giving them access upwards of Rs 50,000) but subsequently they realize that they cannot resist their temptation of using credit actively making them vulnerable to revolve the card. But what is generally ignored is the real cost of credit when a card is used. Most people are unaware of the exorbitant cost of 40% p.a. when a card is revolved and a credit balance is carried from one billing cycle to the next. Even in case of those well informed cardholders, they promise themselves to use it for convenience and pay-off in full before the due date. But credit card issuing banks use different tricks to entice customers to charge the card and carry a balance. For example, the credit limit is enhanced to tempt the holder to charge a high amount so that the card holder has no choice but to revolve the balance.

The high finance charges will stretch the borrowing period as major payments are towards interest and very less towards principal. The duration of the payments on credit cards is never ending as most cardholders choose to pay the minimum amount due on the card. When it becomes a strain to pay credit card bills, the cardholder will either compromise on lifestyle or miss the payment (default). The reason why the cost of credit is high in case of plastic money is because of a high default rate. Banks provide unsecured lending through credit cards to all and sundry so as to increase the credit card base to attract the attention of Retailers. Else retailers would not like to have swiping machines installed at their outlets if there are few cardholders. Hence, the endeavor of banks to have a large cardholder base exposes them to a very high risk resulting in exorbitant rates of interest to all types of customers. Currently, there is no mechanism to differentiate between a low-risk and high-risk card holder by the banking system. So good customers are charged more than their underlying risk and bad customers are charged less than their underlying risk in the existing lending rate mechanism of credit cards.  

Once the card holder is turning risky, the credit card issuing bank would entice the customer to seek a fresh personal loan to consolidate the credit card debt. Instead of seeking this expensive credit card facility, a better option would be to participate in the Fund of a GroupFund. All financial needs can be met as these funds provide higher returns (for savers) and impose lower costs (for borrowers) as they are simple to save and easy to borrow. Group Funds also score over other avenues of borrowing because there’s less bureaucratic and procedural delays. Bidders must get two or three guarantors. In higher value funds, the bidder may be asked to produce collateral security too making it safer for other savers of the Group Fund.


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