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Podcast #18: How to Master Your Cash Flows with Credit-Cards and Overdrafts

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“I was getting married and I had saved up some four or five lakhs, and I was like, this is the first time I have money in my bank account. I really don’t want to go see it go down to zero again. That’s when I learned about what’s called overdraft and set it up for myself…You don’t feel the sense of defeat of seeing all the money that you’ve saved to go down to zero. That’s one way of managing your cashflow…it enables me to continue my discipline of investing every month”

On today’s show, Deepak Shenoy (CEO) and Vashistha Iyer (COO) discuss effective ways to make life simpler by managing cash flows using credit cards and bank overdrafts.

Heads-up:

1. Is parking money in bank accounts a risky proposition?

2. If you earn 1 lakh a month and you get a 1 lakh credit card bill, what do you do? Do you not invest that month?

3. Do ‘No-cost EMIs’ really cost nothing?

4. If you consistently use more than 60-80% of your credit card’s limit, does it affect your credit score?

5. Is it better to have multiple credit cards?

6. Is it safer to swipe your credit card more often than your debit card?

Let us know your thoughts!

Podcast #18: How to Master Your Cash Flows with Credit-Cards and Overdrafts

Transcript:

Vashistha: Hello and welcome everyone to the Capitalmind podcast. You’ve heard my voice in the intro of every single episode, but it’s the first time I’m here inside an episode doing it with Deepak Shenoy.

Deepak: Hi, Vashistha. Great to have you on the podcast. Great to have another fantastic podcast. Today we talk about something close to everyone’s heart, we hope, which is the availability of credit and how we use credit cards and overdrafts and how, basically, to make life a lot more simpler when you know everything and you can manage your cashflow better. Well, let start with the concepts you have, Vashistha.

Vashistha: I’ll have a lot of questions on what are credit card, what are the overdrafts, how you can use them, how you should not use them, so on and so forth. But, first of all, saving money is hard. Do you agree?

Deepak: I totally agree. I’m struggling with that myself sometimes.

Vashistha: How much money did you have when you were 30 years old?

Deepak: To be honest, I was actually bankrupt when I was 30 years old. Of course, there was a problem because I didn’t think money was important at that time. Luckily, I was getting married and to me a lot of the things that happened at that time was simply because I had no idea how personal finances should be managed.

Vashistha: When I joined Capitalmind, that’s the first time I started actually saving money, because she worked in nonprofits earlier, they didn’t pay much. 2017, I was getting married and I had saved up some four or five lakhs I think. Marriages cost money and my dad was like, “I’m paying for a lot of it, but I still need some money from you.” And I was like, “This is the first time I have money in my bank account. I really don’t want to go see it go down to zero again.” That’s when I learned about what’s called overdraft from you and set it up for myself.

I had parked all the money in an ultra short-term bond fund, took an OD against it and still continue to have that OD and it’s come incredibly handy over the last few years. Used that, and I could pay it back over the next three, four months and I never saw my savings go down. I know it makes no sense, because net-net was still your assets and liabilities would balance it off, but what it helps with is behaviour and psychology. You don’t feel the sense of defeat of seeing all the money that you’ve saved to go down to zero. That’s one way of managing your cashflow.

That’s how we are getting started. Why do we use credit cards and overdrafts and other such instruments? I think, forget about points, forget about rewards, forget about playing games on credit for credit card points, but they basically do help you do is manage your cashflow better. If you thought of yourself as a company, as a organization, they also use different tools to manage their cash flows. I should think of credit cards and ODs as tools of cashflow. So, first of all, Deepak, let’s just break down what these things are in the first place.

Deepak: Yeah. I think there’s a great thing that, in fact, when I suggested it to you, I think I didn’t have an overdraft myself. Then, based on your experience, I think picked it up myself, but let’s go back to the basics. You started off with, “I’ve saved some money.” Then, you’ve got to spend something for the marriage, but if you spent it and you took out the money, then you would have no savings left effectively. But you don’t want to do that because, once that money has been saved, it has been saved incredibly difficult amount of time. I mean, it’s taken a lot of time and patience to build that money.

Instead, you take this bond fund, you go to a bank and you say, “If I pledge these units to you, will you give me some money?” So they say, “Well, we’ll give you some money, but you don’t need to use it all at one point.” They might say, “Listen, I’ll give you another bank account. This bank account will have a new bank account number and we’ll give you a debit card against it. You can use it in internet banking.” Anytime you use money in that bank account, that balance goes negative. The negative maybe negative ₹10,000.

Then you get charged interest on that ₹10,000 which you use. Tomorrow, you make back that money. In this case you, I think your experience was that you took an overdraft for a certain amount of money and then, when you made that money back, you paid it back. So if you paid ₹5,000 back, you get charged interest further on only 5,000 and so on. This process allowed you to do this so that I can always draw from it, but my savings continue. So if I earn 8% on my savings and the overdraft is only 10%, I only pay an incremental 2% for the liquidity and only for the time that I need it.

So in a way you saved yourself taxes as well, because if you had, for instance, taken out the money and you had made a ₹20,000 profit, you ought to pay 30% tax on that 20,000 as well. Instead, here you might pay a 2% interest excess, which might only be maybe 1,000 or ₹1,500. I think, interestingly, the idea over here is two things. One is, you create cash. You create a way to use your cashflow despite having the money to do so and to withdraw yourself. In a way, you’re borrowing from yourself.

The bank is earning that extra 2%, but the bank structure gives you the very important need to pay it back. Otherwise, you’ll never pay yourself back, and if you take away from your savings … When was the last time you said, “Well, listen, I took away from my savings. I’ve got to fill up my savings back to where it was again,” and then only start for the saving from that? What has been your experience in the sense, has that changed your … I mean, I know that it’s changed a lot of things from that perspective at the time when you started it off, but from then.

Vashistha: From then, one thing is, it enables me to continue my discipline of investing every month. For example, I had to go to a bunch of weddings in the family. We also took a small holiday with them around that time. So there are some months when you have lumpy expenses, and so if you say, for example, if you were making a lakh a month and you have a one-lakh credit card bill, what do you do? Do you not save that month?

I mean, you could hack the process by paying off that amount through your OD, overdraft, and just still continue to save. Maybe you continue to save, say, ₹50,000 and rest you pay back your OD over time. It will cost you a little bit of money, of course, but that is the cost of maintaining discipline in your investing. I mean, you can go horribly wrong with this also, so this is a hack as long as you know the limits of it. My rule is, my total outstanding never goes more than two months worth of family income.

Deepak: Brilliant. In fact, for me now with kids, I have these mega expenses every three months, which is the school fees. I would prefer not to disturb or disrupt my entire savings procedure. I also save a lot of taxes in the interim, so for me it’s just easier for me to pay through that and then, eventually, replenish the money through my part of my system. This is interesting, but I think another thing that it’s done for you is probably built your credit history to some crazy levels, because you’re actually using credit and paying it back on a regular basis.

Vashistha: Yes. I just shifted to a new phone. My old phone had a lot of SMS spam filters built over years. I was always on Android and just moved to iOS, there is no such thing here. I keep getting all the spam that I was not getting so far. Now I see every second or third SMS is about pre-approved loan, because probably my credit score has gone up. Now I have three credit cards, two of them are billed at the beginning of the month. One is billed in the middle of the month. With this configuration, I can actually now get close to 40, 45 days of interest-free credit for free, which I can manage easily.

One more thing with credit scores is, if you utilize a lot of your limit on the credit card, I think it impacts you negatively in the credit score. I’m not seeing any documentation about it, but I think I’ve seen it happen with me. I’ve also, in our discussion on our Slack channel with our customers, a lot of people discuss this. What we’ve figured out is, as long as you’re using less than, say, a third of your credit limit, it is positive for you. If you consistently use more than 60, 70, 80% of your credit limit, I think it impacts your score negatively. So you can have multiple cards and, if you space them out over the billing cycles, you can get extend periods of continuous interest-free credit.

Deepak: Just as, I think as an aside, I think the problem really for a lot of people is, how do you get a credit card in the first place? How do you build credit history? But if you start off early, you use your credit, they will keep increasing the limits over time. Then, over a period, you might get a five-lakh credit limit, but you’ll use one lakh a month, which helps you to stay sustainably under…

Vashistha: So there are tools you can use, like my primary one with HDFC Bank, I now have a very high limit on it. But what I do is, I go and put in net limits on it so that, even if it gets lost or stolen or misused somehow, it’s not a huge amount, so I usually gap my expenses to my monthly salary.

Deepak: That’s interesting. I use another hack. I have two cards where the second one, I actually request them not to increase the credit limit so that, whenever I feel I’m going to a merchant, which I don’t trust, and perhaps the first time I’ve gone to a salon, I might find it. I don’t know if it’s going to be phished or used … So I actually use a credit card, which has a much lower limit. Even if I lose, it will be relatively a smaller amount. It’s actually got a ₹15,000 limit, so I’m okay losing ₹15,000 on a fraud, but I don’t want to lose five lakh rupees on a fraud.

Vashistha: Also, you can do this with credit card, buy it’s much more difficult to do with debit cards.

Deepak: Absolutely. In fact, one of the hacks of using credit cards is, if you don’t like the merchant, you should never use a debit card, because they can take away all the money in your bank account and they can take it for a long time. I mean, you won’t even know it’s hacked today. They could do this six months later or eight months later.

Vashistha: This happened to my parents. They went to Bombay for a trip and I think their ATM card got cloned and one lakh-something got withdrawn overnight while they were traveling back to my home town in Jamshedpur. It took us like, the RBA guidelines say you’re supposed to get the money back in some 90 days or something, it took us six months. Actually, banks are … Keeping money in banks, I feel is a risky proposition. You could be extremely careful, but you can get conned, phished, something. There’s a Paytm scam going on recently.

Somebody shared their … dad got conned like this and you have to go and fight. In fact, I think you should increase friction in your bank account as an … Don’t have a lot of cash in your bank account, because it’s just liabilities. Anything goes wrong, you can lose that cash any day. Put it in mutual funds and put it in … What I do is, I keep only the minimum balance, the bank must hate me for it, but I only keep the minimum balance there, maybe a little bit more. Everything else is moved to a fund, mutual funds, and I have an overdraft if I ever need cash or any cash needs.

Deepak: That’s a brilliant thing. I think where we are right now, the amount of facilities that are available to us, you pay for something using a credit card, you get a 45-day interest-free period and then you pay back. But even before that, you can use some of these new VC fandangle things. You’ve been talking about it.

Vashistha: Yeah. You can use LazyPay, you can use Simple and you have Ola Money. They’re giving you up to 15 days of interest-free credit again. For example, I use LazyPay to pay all my Swiggy bills and then that set up an auto-pay set up with a credit card, which goes and pays it every 15 days. That credit card auto-pays set up with a bank account, OD account. It’s always auto-debited, so I don’t have to do anything. I mean, and there are, sure, there are some concerns. This card has a lower limit. I’m not too concerned about it.

For a card to the higher limits, I would like to not have suspicious transactions. I don’t set up auto debit, but here’s where app like Credit comes in so handy. It’s made the process of paying your bill so easy and enjoyable that you can use that for that. I wouldn’t use it necessarily for the points or rewards or the games that they have. It was fun when it first came out, but I think the most utility is seeing all your cards in one place, seeing all your bills and your due dates in one place and doing the transactions from there.

Deepak: Yeah. In fact, I think one of the things that we also have in this whole facility is this auto-pay thing. You’ve auto-paid LazyPay through a credit card, you’ve auto-paid the credit card through your bank account. I mean, it’s not usual and we tell people to be really careful about this sometimes. So what’s the downside of having this auto debit that might happen?

Vashistha: Yeah. I think that’s a downside. If you have the random fees applied to you by the credit card company, some suspicious transactions that you never actually did. So if you just keep auto-paying every time and never look at the bills, you might be paying something extra that you haven’t actually paid for.

Deepak: Yeah, this comes up toward a very interesting point. Once and a long time back when I had a dispute on, so there was a ₹1,000-odd, so my bill was 45,000. Then I paid 44, saying, “I have disputed one.” It turns out, this is the worst thing you can do in a credit card, is to not pay the outstanding. It turns out that, as soon as I did not pay the full amount, everything that I had assumed was interest-free for that 45 days, I mean, my bill payment date is the first of every month. The bill is generated on the 12th. So the 12th of December bill will get paid on, say, the 1st of January. And on 1st of January, I didn’t pay.

Now, after the 12th, any transactions that I have done will actually attract interest as soon as I become … I did not pay the full balance as of Jan 1st. That means now on Jan 12th, which is the next billing cycle, I actually get a bill that not only includes the interest on the ₹1,000 I didn’t pay, but it also includes all the spends that I have made that were un-billed. They also attract interest from the day they’ve been transacted on. So this is one huge don’t in credit cards. I think with the dispute mechanism in place, you should eventually expect a refund of it. But don’t not pay, it’s something I learned in the whole process.

Vashistha: So here is another interesting point, if you need cash, what happens? If you use a credit card for withdrawing cash, I’ve never done this, but you know better, what happens?

Deepak: Oh yeah, this is actually same thing. The minute credit card is used for cash. Now, how do credit card companies make money? when you swipe it at a merchant, they charge the merchant that 1% or 2%, so they make money. You get your interest-free period, but somebody else pays the interest for it. But when you take cash, the ATM is not going to pay a percentage as this thing, so you start paying as soon as that cash is withdrawn.

Many credit card, the concept or their application form won’t tell you this, but the minute you get charged for cash, every other payment also becomes interest-bearing from that time. Or in the same way. So you start paying interest on all your spends, apart from the cash spend as well, because now you’re becoming … The way they’ve worked out is that the minute you withdraw cash from a credit card, not a debit card, all your payments become due instantly. If you don’t pay, that means now you’re paying interest on all the outstanding that’s available to you, and that is a 36 to 43% interest per year. It is a ridiculous amount of money.

We’ll come to how much money credit card companies make later, but the 36 to 42% is not something you want to pay and you don’t even know you’re paying it, because you signed some agreement some years back. So simply don’t withdraw cash from a credit card. If you use the overdraft account, the overdraft gives you the cash at a much cheaper rate. 10%, so it’ll actually be a much more beneficial thing to use that rather than to use your credit card. I mean, even in an emergency, in fact, if you can, tell your credit card company never to allow cash withdrawals, but they don’t, because they want to somehow find a way to give you money.

Vashistha: You can actually put cash withdrawal limits on your credit card.

Deepak: Yeah, I think some cards do.

Vashistha: Yeah, it depends. Like HDFC Bank website, I think you can go and do it. Net banking.

Deepak: Yes. In the net banking, they have specific limit for cash and international spends, domestic spends and so on. I guess, certain things that don’t work anymore and they used to was, you have the LazyPay, PayPal by credit card. Earlier there’s Paytm, that was payable by credit card.

Vashistha: Yeah, you could pay Paytm, you could add money in Paytm by using your credit card. There was a point where you could pay Paytm using a credit card, then use Paytm to buy a mutual fund, so you would get 45 days of credit and then earn interest on that free credit. It was nuts at some point.

Deepak: Yeah. I think this whole sequence changed after Paytm started charging I think… they were to charge you a fee.

Vashistha: Yeah. I don’t think that works anymore, that trick.

Deepak: Yeah. It doesn’t really-

Vashistha: This was back two years back, I think.

Deepak: I think it also, one of the things that I’ve learned is that in finance the word float makes the maximum amount of sense. The more float you have, the more time you have, money you have, on which interest is not being charged, the better it is for you in the longterm part of your life. Is the same, I think, on a personal level, banks like HDFC Bank make almost … A considerable amount of their interest income is because they get almost zero cost flow.

So whenever you pay, for instance, a certain bill, your income taxes, your income taxes go in certain side in a HDFC bank account. HDFC eventually pays the Indian government maybe one or two days later. That effectively gives them one or two days of interest-free money. That at scale adds up, so why as an individual would you not choose to have interest-free money? Because if it works for the biggest bank, it should work for you as well.

Vashistha: A couple more things on using credit cards, more ways of using it. We at Capitalmind, we do a lot of financial planning for our customers. We have wealth management clients and people. We just started on RIA as well, where we are doing this, Shameless Plug. One of the questions, one of the most usual requirements in a financial planning process is planning for retirement. The basic input for it is, how much you spent today. The answer to that is, it depends on how much you can recollect. Some people keep track of how much they spend, some people just will have a vague idea of how much they spend. So if you ask somebody how much you spend, somebody will say, “Okay, I spend 50K a month.” Fine, but that’s their usual expense.

That’s rent and living expenses and so on and so forth. But they also have some lumpy expenses which they don’t add up and they’ll multiply, divide, sorry, divide by 12 to get a monthly expense. So one way you can use credit card for this is, use one credit card for all your daily usual expenses. Now, you can even pay rent using credit cards. RedGirraffe, by the way, check it out. For lumpy expenses, use a different period card. So end of year, all you have to do is just add up all your statements to see which were lumpy expenses, which were your daily normal expenses and you’ll have a fairly good idea of how much you’re spending. This is a good way of keeping track of your actual expenses going forward.

Deepak: Yeah. I think, you’ve said this and I think I agree with you that, which expense-tracking app do you use? It’s probably-

Vashistha: I think that has never worked, at least for me. I have tried it several times, but is there any successful expense-tracking app which has excelled at helping people track expenses? Mint started that. I think Walrus in India has tried that, so I don’t know how much it works. It’s not worked for me. The analogy for it is probably a calorie-counting app. Never works, and you’ll probably work for a month.

Deepak: Yeah. After that you realize that you’re spending more time counting the calories than figuring out how to reduce them. So yet again, I think, I mean, you need to calibrate your spending. You need to know approximately how much you spend, but if I tell you things like, “Dude, you’re spending ₹500 on coffee a month. If you went to a Darshini instead of Coffee Day, you would spend 400 or ₹300.” You’ll really look at me and say, “Dude, I like Coffee Day,” or, “I like wherever I go, I just don’t want to …”

Vashistha: You’re good in Bangalore, man. The coffee has to be at third wave.

Deepak: Oh, well, okay. I’m a little out of it right now.

Vashistha: Apparently, there’s also third wave water now.

Deepak: Even better.

Vashistha: #PeakBengaluru.

Deepak: Peak Bengaluru. There you go. One of the other things that I’ve found, especially in credit cards, is the younger folk find it very difficult to understand or get credit cards. The initial part. They pay, I mean, we have had a lot of discussions on this on Slack, “Should I pay ₹20,000, ₹50,000 for this fancy credit card, or should I pay something, for a zero-free credit card?” I mean, what’s your thought on this, Vashistha?

Vashistha: We were discussing this with Shray who lived in the U.S. for a while. I think it works in the U.S., where you have disproportional benefits of points. Where spending $1,000 in dollars versus getting maybe a disproportionate amount in terms of miles that you can use. I don’t think that has worked in India. I have tracked this in my first two years of using credit cards and I used it for booking air tickets. I still do. I mean, that’s the only way I use my points. The yield came out to be roughly … used to come out to be roughly 2.5%. Now, it’s gone down to about 2% of spending. But 2% of spending is really not that much. If there’s a cost to your credit card, it’s like barely anything.

Deepak: Really, to be honest, the way they structure the points, you don’t even know how much you’re getting. For instance, I have a card from HDFC, it tells me I get 12,000 points if I spend so much. Then I find out that 12,000 translates to about 1,500 or ₹2,000 if I were to actually use it as store credit, which is the only thing that makes sense for me. So a spend of, say, 10 lakh rupees will just give me 12,000 points, is equivalent to ₹2,000. That’s 0.2%. Or if you get something higher, they’ll charge you an upfront fee.

They might charge you a ₹10,000 fee and give you something worth ₹14,000. Your net cost of 4,000, is it really worth it? I always struggle with this, and I said, “Okay, one rule of thumb, don’t pay for a credit card unless their benefits are absolutely insane.” I haven’t found that yet. It’s quite interesting that for every person the credit card miles, the concepts are really different. If you’re a traveler, you’ll find cards that work with you on a miles basis, but-

Vashistha: But you could hack the process. I mean, you can go and find something very optimized for your lifestyle. For example, HDFC Diners Black, it gives you some crazy reward points. The new iPhone that came out had some crazy deals on it where you get some points with some cash-back if the cost will go down substantially for you. But should you be so focused on this in your life generally? And the richer you are, the worse off … I mean, it’s a waste of time for you to do all these things.

Deepak: Yeah. I think the richer you are, the simpler the credit card you should just take and not pay for it, of course.

Vashistha: Pay the bill.

Deepak: Yeah, just pay the bills.

Vashistha: Don’t pay a fee for the right card.

Deepak: Yes. I think that’s a brilliant concept. I think we also have, right now there’s SBI card’s IPO that’s going on. Is good, has a bit of an insight about the industry as well. So the interesting thing about SBI card IPOs, when you think about credit cards and you use them, you get this interest-free period and all that stuff, how much is the credit card company or why is the credit card company doing this for you? You’re not doing them a favor by getting an interest-free credit period. Because, if you looked at the SBI card’s IPO, they have 20,000 crores roughly outstanding. That was as of last year, that’s 2018. They made 3,000 crores in interest and another 3,000 crores in fees. So out of these 20,000 crores, they’ve actually made 6,000 crores. That’s 30%.

Now, they’re not doing your favor, you’re doing them a favor by using a credit card. So the industry statistics is insane in this case. And then, credit card spends have grown. Total amount spent on credit cards today is roughly equal to the total amount spent on debit cards on a monthly basis, although there are maybe 25 times the number of debit cards that are out there. So it’s not unpopular for a … I mean, it’s not popular without a reason. But you got 70,000 crores or 80,000 crores being spent a month on credit cards, and yet that is less than 0.5% of India’s GDP per month. If you think about it, credit cards are a tiny part of the overall spend in the country, so it’s still got a long way to go. So it makes sense to optimize because there’ll be more and more that will come onto card cards coming up I guess.

Vashistha: I think it’s a simple tool, use it for cashflow management. You can pair up a credit card with ODs, they go very well together. Another example is no-cost EMIs. Is there anything called no-cost EMIs?

Deepak: That’s a good point. Here’s the thing though. RBA came aboard was a rule and we ought to understand the context behind this. When you buy something from Amazon and somebody offers you a no-cost EMI, nobody makes money out of a no-cost EMI and nobody wants to not make money. So how does, say, a Bajaj Finance or one of these SBI cards-type things make money out of this process? The idea is, they work with a manufacturer. For instance, a Samsung, an LG, an iPhone, an Apple. They will say, “Listen, if you guys get me a customer, then I will pay the whatever interest charges need to be paid, and you can give that person a no-cost EMI.”

Something like, if it’s a ₹50,000 expense, the cost of a six-month EMI. When you’re paying an EMI, you actually pay on a monthly basis, so you will actually pay something like ₹8,000-odd per month for a ₹50,000 EMI. So every month your principal outstanding reduces. So you don’t think of 10% interest rate on a six-month basis equals 5%, equals 50,000 into 5% is ₹2,500 interest. Actually, interest is only about ₹1,200. So ₹1,200 on a 50,000 expense. Now, there’s two choices for the manufacturer. Samsung can say, “Listen, if I didn’t give him an interest-free credit, he’d simply say, ‘Forget it, I’ll come next month. 50,000 is too much.’ Whereas, if you think about it as ₹1,000 a month for six months, he’s like, “Well, I’ll take that.'”

So the push, the nudge for him to take it on is to get this interest-free credit and if it costs Samsung ₹1,200, Samsung says, “I’ll pay, no problem.” This ₹1,200 might actually work out doing 18% return for Bajaj Finance or for SBI card, but you have no idea. Now, can you as a customer go and say, “Listen, ₹1,200, if Samsung is willing to pay the card company, why can’t it pay me? I’ll just pay lesser.” So RBI actually came out with this rule that said, if you as a bank, now, this is only for banks, if you as a bank do this and you say, “I will reduce the amount of … I will basically have a reduced cost and then the EMI is on top of that,” then you have to the customer the ability to pay that as well.

That means, the customer should say, “Listen, I don’t want interest-free, but I’ll pay a lower cost.” Because of this, a lot of banks’ loans are out of the ambit of the 0% interest-free credit, but non-banking financial companies can do it. So there are two kinds. There’s something called HDB Financial, which is owned by HDFC Bank, but it’s not a bank. It’s an MBFC. So they can offer it, Bajaj Finance can offer it, SBI cards can offer it, but what cannot offer it is the bank itself. When HDFC bank can’t offer it, this-

Vashistha: I am not sure how it works. I mean, I just want to get clarity. I’m just pulling out my Amazon order history and I have something on EMI. No-cost EMI from using my HDFC card. It says item, the value X. Taxes, X. Total, something. Then this is something called no-cost EMI discount and that is probably the EMI that’s billed into my no-cost EMI.

Deepak: Yes. Effectively, they give you a no-cost EMI discount, but your EMI is calculated as if the discount wasn’t there in the first place. So if you have ₹25,000, that was a bill. They’ll say the no-cost EMI discount is ₹800, so your invoice is 24,200. But you pay 25,000 divided by, say, six month EMI. 25,000 divided by six is what you pay every month. The bank or the financial institution earns 25,000, you pay 24,200 to Amazon. ₹800, effectively old time, goes to the bank and, of course, if there was a way for you to get that 24,200 without going through no-cost EMI route, then I think you should take it. But they don’t expose that option easily for you. Well, it’s like either I pay 25,000 with no-cost interest for six months, and you should just take this simply because the 25,000 in a bank will earn you some interest. So it’s just-

Vashistha: Another thing you’ll see if you have a bigger spend on a credit card is they give you an option to convert that spending to an EMI, but that will cost you anywhere between 13 to 18%, depending on what kind of card do you have. If you had an OD at 10%, you can simply pay the whole damn credit card bill through OD and just pay the 10% on the OD.

Deepak: Yes. In fact, what they don’t tell you when they do this convert to EMI, I think sometimes there are these processing charges for that loan, that-

Vashistha: And you have GST and other things on top of it.

Deepak: You’re at 14% loan with, say, a GST and a fee of even ₹500 might well go to 16, 17% unnecessarily. Whereas you can have a 10% OD against it, so you can convert anything you want to an EMI and not depend on the bank to do it for you.

Vashistha: All right. Let’s wrap it up. I think, Deepak, you had a list of, had me make a list of do’s and don’ts when using these things. You want to go through them?

Deepak: Yeah. Let’s do the do’s. Use a credit card, get yourself a credit card. Use multiple credit cards, one with lower and higher limits. Do use your credit card instead of a debit card whenever you have the opportunity or when you feel that you don’t trust the merchant very well, because debit cards are much harder to recover money from. Remember also to ensure that you manage the limits on y our cards efficiently, so that you have different limits, payment dates. One other big don’t that I really want to say is, never not pay your credit card bill in full. That means, always pay your credit card bill in full. Even set up an auto debit from your bank account so that you don’t get charged late-payment fees or interest charges, because the interest costs are heavy.

Never withdraw cash from a credit card. You always use a debit card. Do create an overdraft account with your investments. Your investments can be anything really. It can be your debt funds, debt funds are the most efficient, because they’re very easy to do it. You can use your equities as well. Let’s say you buy an FTETF and you don’t want to sell that FTETF for the longest time, keep that FTETF in a good old bank and say, “Give me an overdraft against it.” The bank will charge you. It’s about 1,000, ₹1,500 a year or so. That’s a much more efficient way to ensure you never sell that investment for as long as you have this loan, and this loan is available for any liquidity.

So instead of selling the investment, you have the liquidity available to you. So create an overdraft and use it judiciously whenever you need for instant EMIs at a much lower rate. The EMI processes just to pay back your overdraft account whenever they’re required. This will actually create two different bank accounts for you, but it’s actually more efficient. The last part that you should use a credit card for is, or you should not use a credit card for is, on Forex charges. Because, Forex is extremely expensive in a credit card, use something like NIYO, which is a combination of a bank account and a debit card. Much more efficient, saves you nearly 3%. You will never…

Vashistha: NiYO is a financial product discovery of the year.

Deepak: For us it is. I mean, I’ve gone abroad three times now and it has been phenomenal, because I can actually check the rates online where I’m checking the rates available and I’m getting literally that plus one paisa here and there. Whereas, I get 60, 70 paisa more on a dollar, which is really one, 1.5% on spends that are made through a credit card. So don’t use a credit card for Forex expense. Do use something like a NIYO. NIYO is actually probably the best product in that timeframe. Don’t ignore your credit card fees, check your credit card for random fees that they’ve added. Many times they will reverse them if they are unnecessary.

Vashistha: In fact, CRED like to analyze your statements. A lot of people are afraid of CRED, because it needs access to your email account. One way to get around to it is, create a new email account. Set up auto forwarding for all your bill statements to that email account and give them access to that one single email. Anyway, they have your credit history. There’s nothing hidden. I mean, people think a lot about privacy, but if you are a credit card user, the credit bureaus know everything you spend on every single transaction you do, and it’s available to anybody to access who is in this space.

Deepak: Yeah. If you think you’re private, wait till you ask for our own credit card statements and you can see how much everybody knows about you. They know the way you spend, how much you spend, what you spend on. Today, credit scores are only used for giving you credit. In the U.S., credit scores are used even for a person who’s trying to rent an apartment. Your rent might actually increase or you might have to pay a higher deposit if your credit score is really low. If your credit score is low, your employer might deny you a job at some point. This will eventually come to India, I don’t know when it will, but it makes sense for you to build your credit score. That means, pay your credit card bills on time, don’t use too much of your credit card limit, in which case, increase your limits to the point where you’re using a lot lesser of them. Build your credit score judiciously. That is, don’t end up with-

Vashistha: Always pay in full.

Deepak: Always pay in full and always pay on time. Even your personal loans or EMIs, don’t default on them. Every default costs you time to make up the score over a longer period of time.

Vashistha: All right, Deepak. Thanks a lot. A fun discussion on something we keep discussing a lot on our SLACK channel. I hope you guys found something useful in this podcast.

Deepak: Great. Thanks for your time. Thanks all for listening. Visit capitalmind.in for everything we have, capitalmindwealth.com for our PMS and wealth management services and comment. We are on Twitter. I’m @DeepakShenoy. We are @CapitalMind_in. Vashistha’s @uptickr and you’ve got AstuteAditya. He’s also on Twitter, he’s quite silently sitting in the background getting all this stuff recorded and coming to you. Thanks again. Thanks for listening.

 

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