Credit cards are now becoming increasingly popular in India due to swiftly rising digital transactions and increased consumption. Did you know that India currently has more than 58 lakh credit card users and the market is expected to increase by 25% p.a for next 5 years in India (as per research by Outlook India). This means there will be around 1.5 to 2 crore credit card users by 2025.

A major part of our client base, especially in the age group 25 to 45 might already be using a credit card or they might get one in future. But this easy access to so called “interest free money” which rewards a person in the form of reward points and cashback for spending can be one of the most expensive financial mistakes our clients would make if they do not use the credit cards wisely.

We always try to talk about credit card spending and good credit behaviour with our clients. While talking about debt management, we often find that each client has a very different behavioural pattern when it comes to credit card usage.

So, let’s see how we can add value to our clients’ financial life and help them manage their cash flow and expenses better if they are already using credit cards.

Let us first look at some quick fixes to routine credit card woes:

We can categorize clients into 3 buckets. Most of our clients will likely be in one of the 3 categories.

1) Clients with huge credit card debt –

• Clients carrying forward credit card balances for months by paying minimum dues
• Struggling to pay their complete credit card bills.
• May have no control over their spending
• Clients who had a sudden unwanted expense which they were unable to repay in time.
• Generally prone to getting into trouble from time to time with outstanding amounts and credit scores
• Also miss their SIP instalments and insurance renewals from time to time.
• Sometimes, they are just not aware that good credit behaviour entails clearing the full credit card bills from time to time and not just paying the minimum amount

Most credit cards in India charge an interest of around 36 to 43% per year when the dues are not paid in time. This cost can be around 16 to 19% for our NRI clients from the US. This will differ from country to country, but credit card debt is one of the most expensive forms of loan worldwide.

So, a person having Rs 1,00,000 in outstanding credit card balance effectively pays an interest of around Rs 36,000 to Rs. 43,000 per year in India. To earn the same kind of interest from fixed deposits in India a person will have to invest around 7 to 8 lakhs if we get around 5%-5.5% p.a. leaving aside the taxation on the investment.

Any investment in India is unlikely to beat the interest charged by these credit card companies. Even Warren buffet says that he cannot beat this return when compared to the interest charged by credit companies! He also recommends any person to clear their credit dues before investing anywhere. So as planners we need to formulate a strategy to help our client pay off this high interest credit card debt.

This can be done by following options depending on client’s situation –

Solution 1:

Pay by selling part of existing investments – Debt funds, Fixed Deposits, EPF, PPF, Bonds, Gold, Equity Funds, Stocks etc. can be sold to clear the credit card debt.However, we need to consider the client’s situation in terms of asset allocation, goal priory and taxation in mind. This might be best option in most cases.

Solution 2:

Take Lower cost loans – Overdraft from bank, loan against investments (Mutual funds and stocks), loan against insurance policy, loan against PPF, getting top-up loans if having existing home loans, etc. These forms of loans can cost around 7 to 12% p.a. which can be much better than paying 36 to 43%, right? Our nudge to our clients to restructure high cost debt to low cost debt can make a really massive difference to their cash flows and attainment of financial goals.

Solution 3:

Converting Loans into EMIs or Balance transfer – Last but not the least many credit cards have the option to convert the current outstanding into EMIs and if the cost is not efficient many cards also have options for balance transfer to other credit cards. Here we can plan a strategy so that clients can pay off the entire loan over the period of a few months. EMI options can reduce the interest cost in the range of 12-24%p.a

Here we can simply try to save money for our clients by getting them out of credit card debt. Once their credit cards’ dues are cleared,we can ensure that clients have sufficient emergency fund. Credit cards do come with good benefits but these clients might be better off without credit cards specially if you see repeated patterns.

2) Client using many credit cards –

• Want to earn maximum reward points
• Use all possible offers on credit cards
• End up owning more than 4-5 credit cards over a period of a few years.
• End up paying higher overall annual fees
• These are clients who are unable to keep a track of their spending and occasionally spend more than they want to.
• These clients might also sometimes miss or delay credit card payments.

There have even been cases in past where a person had more than 30 credit cards in India.

Here are the things we might be able to help them with –

Solution 1:

Helping them reduce the annual fees – A rupee saved is a rupee earned. Annual fees are the fixed cost which any credit card user has to pay every year. Apart from a few good credit cards most credit cards in India charge a fee in range of Rs 500 to 5000 p.a. On average 2-3 credit cards are more than enough for most users. A simple activity of analysing the spending will let us know the cards which benefit our clients the most. The cards providing maximum benefit should be continued while others can be discontinued.

Solution 2:

Helping them track their Spending – Most client have no clue about their actual spending and most give estimated numbers during data the collection process. But there are popular apps like Cred (Made by Kunal Shah who was also founder of Freecharge) which help credit card users track all their cards’ spending and dues in one place. The app also provides payment reminders, gives the spendings’ break-up by category, gives good insight on annual and monthly spending of a particular card, cautions on hidden charges etc. Using such apps might help our clients track their expenses and also help them pay their dues on time.

Solution 3:

Helping clients budget their expenses – Clients need to understand the importance of budgeting. Being conscious of their spending behaviour helps us manage their money appropriately. Typically, the best way to manage it is to avoid spending on what they don’t need. Budgeting is a commitment, and sometimes a daunting one, but one that we cannot afford to ignore.

3) Clients who spend money wisely –

• These are clients who are smart and always spend wisely
• They know where they are spending and try to never overspend.
• Use credit cards to improve credit score and for benefitting from good rewards programs.
• Always pay dues on time
• Use credit card for paying monthly electricity bills, DTH/mobile recharges, and filling fuel, buy groceries etc. Most of their spends are on essential items.

But, here are the things we might be able to help them with –

Solution 1:

Setting up Billing Cycle – Most credit cards have a window of around 45 days of credit free period (28 to 31 days of monthly billing+15 day to clear the due). This means users can plan their expenses based on cashflow and accordingly maximize the benefit of this credit free period and earn interest during the same time by keeping money in bank or by investing in Liquid funds. Also, one can change the billing cycle date by calling customer care is such way that it maximizes the benefit based on expenses and salary date.

Solution 2:

Paying House rent by credit card – Yes, there are platforms like Redgiraffe and Cred which allow users to pay house rent by credit card once you register with them. This is a win-win situation. The Land lord gets predictability of timely rent.  Also, the person renting the property can negotiate a better deal because the landlord will have certainty of timely payment. Apart from this the client will get a credit free period of up to 45 days and also earn reward points for using credit card.

Solution 3:

Negotiate the Annual credit card fees – Yes, this is possible. You will never get it if you never ask for it. In many cases if a customer has a very good track record with credit card company, they can call customer care ask for reducing credit card fees and also increase the credit limit.

All the above-mentioned tricks might sound simple but due to the magic of compounding these savings add up over a period of time and end up saving thousands and most cases lakhs of rupees for our clients.

For most financial planners adding this activity as a prt of their practice might not generate additional revenue but this is in the best interest of your clients and will also help you to understand them better. This will also strengthen your bond with the client and a stronger bond with clients in turn will increase the chances of getting good referrals.

Do you have any other such tips to manage clients’ credit behaviour and help them use credit cards better? Do share your inputs with us in the comments below!

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