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Use your credit card this Diwali, but take no debt

Using reward points is a good idea, but look at the terms and conditions and what suits you be
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First Published: Mon, Nov 12 2012. 10 57 AM IST
Diwali and shopping are almost synonymous. No wonder offers and discounts are lined up this season. However, before touching your Diwali bonus or spending mindlessly through your credit card, pause and look at the reward points you may have collected in your credit card.
A look at the relevant brochure may reveal that what you wanted to shop for is right there in the list and fits your savings in terms of reward points that you accumulate on your credit card or the cashback offer you may be able to avail.
Says Mumbai-based Nikunj Gandhi, a private investor in stocks and derivatives, “To get benefits from your necessity spending is incentive enough for a credit card to prevail over a debit card.” If you are a regular credit card user like Gandhi and spend Rs.20,000 every month, you would have accumulated around 2,400 reward points in a year, which would translate into Rs.2,400. Based on your card variant, say silver, gold or platinum, and your desire, you can choose among apparels and consumer durables. For instance, if you are an HDFC Bank Ltd customer and have accumulated 10,350 points, you can redeem it for an Apple iPod 2 GB Shuffle.
Says Uttam Nayak, group country manager, India and South Asia, Visa, “During the festive season, spends on jewellery and consumer durables rise by as much as 80% compared with non-festive period. Department stores and apparel categories also record a 40-50% increase in transaction through cards.”
Here is how you can make the most of all the credit cards that you have.
Count your reward points or cashback you get
Before venturing out to shop, it would be sensible to calculate how much points you have accumulated. Most banks reward you in the following way: if you have spent Rs.100, you will get one reward point and one reward point is equal to Rs.1. So if you have spent Rs.30,000 in the past couple of months, you will have around 300 reward points, which is equivalent to Rs.300.
If you do the math, you will realize that cashback offers are actually more rewarding. Most of the banks in the market offer a cashback of 5-7%. So if you spend Rs.6,000, you will get a cashback of Rs.300—5%. Compare this with the example of reward points and you will realize the difference is quite a bit.
What should you do?
Look at conditions: All offers come with certain terms and conditions and so do reward points. So the best thing to do would be to look carefully for the star sign and what it stands for. The terms and conditions usually work in the favour of the bank, but you can make it work in your favour if you are more aware of it. So move before the expiry date gets over and ensure you reach the right store, among other things.
Timing is also important. For example, if you want to go to your hometown, you may want to look at deals on air tickets for the relevant dates.
Know what you need: This is very important. This will help curtail impulsive shopping for things you may not really need. So if you want a footwear, directly go to the footwear section.
Says Suresh Sadagopan, a Mumbai-based financial planner, “If you see a product on offer which you would anyway buy in the near future, only then go for it. The best thing is to make a list of things that you need. This will keep you away from any kind of impulsive buying.”
Watch out for: Regular use of credit card will help you accumulate reward points. But it’s not as simple as it sounds. These reward points will come to you only if you don’t default on your dues.
Always remember that falling into a debt trap through a credit card is very easy because interest rates are very high (see graph). Says Sadagopan, “The best way to stay away from the debt trap is by being disciplined. Also, buy only if you are sure you would be able to pay back before the due date.” If you want to use a credit card regularly, you also need to ensure that you repay your bill regularly—not just the minimum due amount but the entire bill.
Different cards come with different terms and conditions, which may or may not suit you, so while taking a credit card, you need to take a holistic view rather than just being guided by the reward points.
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First Published: Mon, Nov 12 2012. 10 57 AM IST