n How I make my card work for me, a reader wrote an interesting piece on how he uses his credit card to the hilt. Not all agreed.

Here we have Amit Kowli on why he sees the credit card as an enemy and the debit card as a friend.

I have a great idea for someone who wants to get into a debt trap. It is quite simple actually. All you have to do is get yourself a credit card.

Think I am kidding? Hear me out.

Chances are, a sales agent will call you and try to woo you with a card that has no membership fee and no annual renewal fee. So you will jump at it (after all, it's free!).

Hold on! Have you considered how the bank issuing the card is going to make money? Remember, there is no free lunch. They will make you pay for it in different ways.

• Smart ways to manage your money

Cash back

Sounds great! You spend and they actually give you some money back. But, the key word is spend. For instance, one of the offers was that you get back 5% of every purchase provided it is Rs 2,000 or above. Nothing if you spend less.

Or, they give you points. You accumulate the points and hey, you get a gift if you accumulate a fair number of them.

Got it? Their job is to get you to spend and spend!

• How to start saving

What's wrong with spending?

Nothing actually. But, it all depends on where you manage to draw the line.

You may consider yourself self disciplined but when you realise that you have a huge credit line at your disposal, self restraint takes a backseat.

And, chances are you won't care much. After all, the card agent sweetly assured you that you need not settle your entire bill at the month end. Just pay 5% and carry the balance to the next month.

Let's assume you buy that Plasma television for Rs 1,50,000.

Since you don't have the necessary cash at the moment, you decide to use the revolving credit option and pay 5% of the amount -- Rs 7,500 -- now.

The balance (Rs 1,42,500) is carried forward and will be added to your next bill. 

Good news over!

Now get ready for the bad part. The bank will charge you an interest of 2.95% on the pending amount.

And, this interest is charged on a monthly basis; per year, it works out to a whopping 35.4%.

At 2.95% per month, your interest on Rs 1,42,500 works out to Rs 4,203.75 a month.

So, if you don't use your card in the coming month, your next credit card bill will be Rs 1,46,703.75 (Rs 4,203.75 + Rs 1,42,500).

However, in that month, you happen to go out for dinner and the bill comes to Rs 1,000. You pay for it with your credit card.

Unfortunately, you are no longer enjoying the benefit of 'free credit'.

Earlier, you spent money through your credit card and paid up when the bill came at the end of the month.

From the time you spent the money till the time you paid the bill, you were enjoying free credit; when the bill came, you paid just what you spent.

Now that you owe the bank money, you don't have the privilege of free credit anymore.

The Rs 1,000 you spent is added to your outstanding balance of Rs 1,42,500. You are now expected to pay interest on Rs 1,43,500 (Rs 1,42,500 + Rs 1,000). As a result, your total interest now works out to Rs 4,233.25. This means you now owe the bank Rs 1,47,733.25 (Rs 4,233.25 + Rs 1,43,500).

Now, until you clear your loan, every single payment you make using your card will be added to your loan amount and you will be charged interest on it. 

This will go on till every single rupee has been repaid.

Well, I guess I have made my point. With barely any effort on your part, you have just entered a debt trap in which you end up spending more than you make and more than you can afford to pay.

• Save and repay your loan

The way out

Try a debit card. It matches the credit card in convenience. You can take it anywhere you want and use it to make purchases or at a restaurant.

Moreover, you are forced to spend only what you have.

Here, you do not get a credit line as in a credit card. This card is directly linked to your savings account and you can spend only to the amount you have there.

The moment you touch your limit (your bank balance limit), the card will not pass any transaction.

Sure, you may wipe out your bank balance but you certainly will not get into debt.

With a credit card, you end up doing both � get into debt and then wipe out your saving to repay it.

Agreed, the credit card bill works as a money management tool but so does the debit card. Just walk up to your ATM and take a mini statement to look at your savings and expenses.

• A debit card with a difference

There's more to life than spending

Don't worry about not getting that plasma TV which you so desperately want. Your world won't come to a sudden end just because you have to wait a while for it.

Instead, consider other options like going in for an interest-free installment scheme. If you desperately need it, try for a personal loan. You may get it at 11% from your company but at a steep 18% outside. Just pay the regular monthly installments and it will work out cheaper than incurring credit card debt.

And, as for not being able to buy your girlfriend the expensive gift this month, I am sure she won't dump you because of that!

Illustration: Uttam Ghosh