Why a Credit is not a saving but a Financial Liability
‘Save for a rainy day' is the most common advice we hear.
No one knows the future and a discerning person allocates a
certain amount of his income towards savings. There are
many ways to do this. Opening a separate savings account,
investing in stocks, paying towards insurance and annuities
are some of the common methods that people use to save
their money.
There are however quite many people who prefer to use
credit cards regularly and for almost all transactions,
whether necessities or luxuries. They do this in the
mistaken belief that not paying for the same in cash is a
form of saving.
One of the most common psychological barriers that a
consumer has when it comes to his purchasing power is the
use of money. It is human tendency to consider a product to
be costly when payment is made in cash. It has to do with
the physical handing over of the notes in relation to
obtaining the product.
When we pay cash, we tend to evaluate the value of the
product more seriously. On the other hand, paying by the
credit card also has a psychological connotation. We tend
to see only the affordability and not so much the actual
value of the product. The ease, with which we can afford
almost anything by using a credit card, drastically reduces
our ability to make a rational evaluation. We also break
down the total cost into monthly instalments and
rationalize the purchase. This has a flip side however.
Credit cards provide the consumer with the flexibility to
afford a better lifestyle, which may be even beyond his
income. The breaking down of the payment into small monthly
instalments also gives the purchaser a false sense of
affordability. What is not calculated however is the rate
of interest involved and the fine print in case of a
default in payment.
A large amount of people use credit cards to purchase
everyday groceries, pay for medical bills, education fees,
expensive holidays, utility bills and more. The idea of
‘cashless payment' is so appealing that credit cards have
become a way of life rather than a facility for
emergencies. While paying by card does not eliminate the
truth that at some stage the cash has to be handed over, it
is the facility of deferred payment that is the big draw.
There are many important factors that a credit card user
has to understand before he even gets one.
The requirement of all credit card companies is payment of
the minimum balance. Usually, this is what most people
think they should pay and nothing more. This only carries
forward the credit and consequently adds to it the interest
as well. This means that the consumer may end up paying a
large amount of interest over a number of years. There is
also the possibility of the interest becoming more than the
actual cost of the product. So in effect for the so-called
‘cashless payment' you are paying more cash than you should.
Further there is nothing to stop the credit card companies
from hiking the APR (annual percentage rate) at any point
of time especially if you default on payment. Added to
that, the late payment fees and other hidden charged will
only increase your liabilities.
If you need to invest, you need to take an option in which
your monies bring returns. It is a simple calculation. You
must see growth in the investment or else it is not one.
Credit cards are definitely not the right way to seek
growth. If anything, they only stunt your growth by
increasing your liabilities and make you a debtor rather
than an investor.
