Credit Cards & Debt

Remember from our Financial Basics topic? A liability is money you owe to someone else. In simple terms, debt is money you've borrowed that you need to pay back, often with extra charges called interest.

Taking on some debt isn't always bad (like maybe a student loan for college later), but it's crucial to understand how it works and manage it carefully.

A credit card looks like a debit card, but it works differently. Instead of using your own money from your bank account, a credit card lets you borrow money from the card issuer (usually a bank) to pay for things.

You get a bill later (usually monthly) for everything you bought using the card. You then need to pay back the borrowed money to the bank.

Sounds convenient, right? It can be, but it also comes with significant risks if not used very carefully.

Here's the biggest risk with credit cards: If you don't pay back the entire amount you borrowed by the due date on your bill, the bank starts charging you interest on the unpaid amount. And credit card interest rates in India are typically VERY high!

We're not talking about 8-10% per year like some loans. Unpaid credit card balances can attract interest rates of 30% to over 42% per year! That's incredibly high.

This means even a small unpaid amount can grow very quickly, making it much harder to pay back.

Your credit card bill will show a "Total Amount Due" and a "Minimum Amount Due". Paying only the minimum amount might seem tempting because it's a smaller number. BUT BEWARE!

If you only pay the minimum:

• You are still charged the high interest rate on the rest of the unpaid balance.
• Your debt keeps growing because the interest charges pile up.
• It can take years (and cost you a lot more money in interest) to clear the debt this way.

Paying only the minimum is one of the fastest ways to fall into a credit card debt trap. Always aim to pay the total amount due by the due date.

Credit cards are designed to make spending easy, which can be risky:

• Impulse Buying: It's easier to swipe a card than hand over cash. This can lead to buying things you don't need or can't really afford just because it feels easy in the moment.
• "Buy Now, Pay Later" Mentality: Credit cards encourage spending money you don't have right now.
• Easy EMIs: Many cards offer to convert large purchases into Equated Monthly Installments (EMIs). While this breaks down payments, it often comes with interest and processing fees, and makes you commit to paying for months or years, potentially hiding the true cost and encouraging overspending.

A debt trap is a situation where you owe so much money that it becomes incredibly difficult, or even impossible, to pay it back. The high interest keeps adding up, and you might feel like you're just working to pay off interest without reducing the original amount you borrowed.

Warning Signs You Might Be Heading Towards a Debt Trap:

• You consistently spend more than you earn.
• You only pay the minimum amount due on your credit card bills.
• You use one credit card to pay off another credit card bill.
• You need to take out new loans just to cover payments on your old loans.
• You feel constant stress and anxiety about the money you owe.

Like easy EMIs on credit cards, standalone "Buy Now, Pay Later" (BNPL) services seem convenient for buying things immediately and paying over time. However, they share similar risks:

• Easy to Lose Track: Having multiple small payments due for different items can make it hard to track your total debt.
• Encourages Overspending: It makes expensive items seem more affordable than they are, leading you to buy things you wouldn't if you had to pay upfront.
• Fees and Interest: Missing a BNPL payment can result in late fees and sometimes high interest charges, adding to your debt.

Treat BNPL and EMIs with extreme caution. Only use them if absolutely necessary, if you've budgeted for all the payments, and understand any associated fees or interest.

Being stuck in debt isn't just about money. It has serious consequences:

• Stress and Anxiety: Worrying about how to pay bills can significantly impact your mental health and well-being.
• Damaged Credit Score: Failing to pay back loans or credit card bills on time ruins your credit score. A bad credit score makes it very difficult (or expensive) to get loans for important things later in life, like education, a vehicle, or a home.
• Legal Action: If you consistently fail to pay back significant debts (like defaulting on multiple EMIs or loans), lenders can take legal action against you to recover the money.
• Limited Future Choices: High debt payments can eat up your income, leaving less money for savings, investments, or even basic needs and wants.

While teens usually can't get their own credit cards, it's good to know how to use them responsibly for the future:

• Treat it like a Debit Card: Only spend what you know you can pay back in full by the due date.
• Pay the FULL Balance: Always, always pay the total amount due, not just the minimum.
• Track Your Spending: Keep an eye on your credit card statement regularly, not just when the bill arrives.
• Avoid Cash Advances: Taking cash out using a credit card usually comes with very high fees and immediate interest charges.
• Have Only What You Need: Don't open too many credit cards.

Used wisely, a credit card can be a tool. Used carelessly, it can lead straight into a debt trap.