Finance World

How to Get Rid of Credit Card

Date: 02 July 2024

In today’s world, the middle class often finds itself ensnared by credit cards. The allure of extra points, airport lounge access, and discounts on online purchases, groceries, and restaurants is strong. However, are you aware of how this can transform into a nightmare of endless EMIs?
To understand the impact of poor credit card habits on people’s lives, below the provided story for examples.

Example 1: Rajesh’s EMI Entanglement (Indian Context)

Rajesh, a 32-year-old software engineer in Bangalore, received a credit card with a ₹5 lakh limit. Enticed by zero-cost EMIs, he bought a high-end smartphone, a large smart TV, and a new laptop. He also used the card for weekend getaways and dining out. Within months, Rajesh’s card was maxed out. He started converting large purchases to EMIs, not realizing how they
were accumulating. Soon, half of his monthly salary was going towards credit card bills. With a car loan EMI and house rent to pay, Rajesh is now struggling to make ends meet. He’s considering moving back to his hometown to cut costs and repay his debts.

Example 2: Mike’s Minimum Payment Trap (US Context)

Mike, a 35-year-old teacher, used his credit card to fund a lavish wedding, believing he could pay it off quickly. He charged $15,000 to his card with an 18% APR. Making only minimum payments of $300 per month, Mike didn’t realize it would take him over 9 years to clear the debt, paying an additional $11,000 in interest. This ongoing financial burden has strained his marriage
and forced the couple to delay starting a family and buying a home.

These examples demonstrate how credit card misuse can lead to significant financial difficulties, affecting major life decisions and overall well-being, regardless of the country or cultural context.

The Necessity of Credit Cards:
It’s crucial to question why we need credit cards. Are they truly essential? I believe not. Banks and financial advisors promote them for building a better credit score. But why do we need a credit score? It often leads to taking out loans and becoming trapped in more EMIs.

Two to three decades ago, before credit cards and credit scores existed, people lived more peacefully. Home loans were the primary financial burden, and even those were rare. Most individuals built or purchased homes upon retirement. At that time, taking a loan was considered taboo.

Today, we see loans everywhere. We’ve grown fond of borrowing – credit card loans, travel loans, loans for TVs, ACs, and various items. We accumulate numerous loans, but is this necessary? Are we merely trying to project wealth to society? For insight into how companies exploit our purchasing habits, consider reading “Power of Habits” by Charles Duhigg. .

In my opinion, a credit card should serve as an emergency fund. Use it only if you lack an emergency fund. I understand that financial demands can make maintaining an emergency fund challenging.

Credit cards shouldn’t be used for groceries, restaurant payments, or online purchases with EMIs. Reserve them for genuine emergencies like hospitalizations or urgent travel needs. Don’t be swayed by Amazon or Flipkart offers. Purchasing with credit cards or online payments is effortless. Here’s an exercise to try: When planning to buy a mobile phone, avoid online purchases or card payments. Instead, use cash. You’ll likely find it difficult to spend 100,000 in cash at the counter for an iPhone or high-end
Samsung.

How to Break Free from Credit Cards:

1. Avoid the maintenance cost trap:

I once had an unused credit card and was asked to spend a specific amount annually to waive the maintenance fee. As middle-class individuals, we prefer to avoid such costs. In my case, I needed to spend 150,000 INR yearly to waive the fee. I chose to close the card rather than develop a habit of unnecessary spending.

2. Refrain from credit card EMIs:. 

This is another pitfall. Attractive offers for large TVs or refrigerators often tempt us to use credit cards, even when our current appliances suffice. Instead, create a SIP for the EMI amount you’d pay. Save for 6-12 months and purchase with cash. This reduces financial strain and provides a sense of accomplishment.

3. Stop using credit card on groceries and restaurant – 

I prefer using debit cards for these expenses. This helps manage monthly spending and reduces reliance on next month’s credit card bill. It’s disheartening when a significant portion of your salary, received on the 1st, is consumed by credit card bills on the 5th.

4. Full payment on monthly basis-

Avoid converting balances to EMIs. If necessary, borrow from family or friends. Credit card interest rates range from 21% to 41% annually, far costlier than other loans.

When to say good bye to credit card:

Following these rules will significantly reduce your credit card usage, reserving it for emergencies. To completely eliminate your credit card:
Credit cards have a monthly spending limit. Start a SIP when you receive your salary or business income. On the 5th of each month, invest 10% (or less, based on your budget) in a SIP. If that seems challenging, begin with 1,000 INR.
Once your SIP savings reach your credit card’s maximum limit, you can close the card and enjoy financial freedom. You can use these savings for emergencies instead of relying on credit.

Conclusions

In conclusion, while credit cards can offer convenience and benefits, they also pose significant financial risks when misused. As we’ve seen, the allure of easy credit can lead to overspending, accumulating high-interest debt, and long-term financial struggles. The key to financial well-being lies in responsible credit card use, or even avoiding them altogether if possible.

Remember these crucial points:

1. Use credit cards primarily for emergencies, not for regular expenses or impulse purchases.
2. Avoid the trap of spending to waive maintenance fees.
3. Steer clear of credit card EMIs for non-essential purchases.
4. Always aim to pay your credit card bill in full each month.
5. Build an emergency fund as an alternative to credit card reliance.

By following these guidelines and treating credit with caution, you can maintain financial stability and peace of mind. The path to financial freedom often involves living within your means and saving for your goals, rather than relying on credit. Remember, the most valuable things in life –peace of mind, financial security, and freedom from debt – can’t be bought with a credit card. Take control of your finances today, and work towards a debt-free, financially secure future.