Investing in financial literacy is the best investment. It starts with high school math.
In part 1 of this blog series, I posed 5 questions for you to self-assess your financial literacy. The right answer doesn’t matter. It is important that you have the tools to evaluate such questions. The great investor Warren Buffet himself stated that you don’t need anything more than high school math to be a great investor.
Let’s address the card
The first question I posed was on credit cards. It seems very convenient to pay the minimum amount due and tackle the total amount next month. 2% a month doesn’t sound much, does it? This is one of the worst mistakes to make. To help you understand the magnitude of this interest rate, compare it with a fixed deposit. Currently, Finserv MARKETS offers 8.95% for a 1 year FD. If you pay the credit card company 2% a month, it means 24% a year. This is not all. You pay credit card interest after paying for taxes. If you pay, say, about 20% income tax, this means 24% / (1-20%) is equal to effectively paying 30% interest. I don’t think you will ever find an FD that pays you 30% no matter the duration.
Reflect on the math involved. It is basic high school stuff. In my experience, the fear of estimating the amount incorrectly or the perception of having to deal with complex transactions prevents people from assessing the options. You don’t need to get it absolutely accurate. In this case, if credit card interest outgo is estimated to be greater than FD rate, you can pretty much conclude it is a bad decision not to pay off the credit card amount. It is not critical if you arrive at the 30% figure.
With a reasonable credit score, you can expect to get a personal loan for a lesser amount than 30% for sure. Insert link to apply for PL. If you happen to own a property then you can get it for even lower rates similar to FD, through a loan against property.
Just to make sure there is no confusion, here’s the expert comment on whether credit cards are a good idea:
- Credit cards are awesome. I just pay the minimum and roll over the outstanding to next month. I am waiting for my bonus to pay off the outstanding. (great decision / bad decision).…definitely a BAD DECISION.
It is useful to do transactions with a credit card. They often protect you from fraud, let you earn cashback, get lounge facilities, and other points. To prevent getting hit by unexpected fees due to missed payments, I strongly encourage setting up an auto-debit payment option. With RBI and other regulators monitoring credit card companies, there is a little chance of your account getting incorrectly debited.
Among the 5 questions, this one on credit card was the most straightforward. Assessing the LIC decision is a bit nuanced. I will tackle it in my next blog. Do share your perspectives in the comments section of this blog.