The Credit Trap - 10 Symptoms

There was a time when credit cards were status symbols, when only the elite had access to them and it was unthinkable that a college going kid could possess a credit card. And then came along liberalisation and more importantly the Cyber Age, when suddenly salaries zoomed up, incomes became highly disposable and credit cards ceased to be status symbols. If status was the issue, then the criteria was defined by Platinum and Titanium cards.

The present. Or can we say the Post Cyber Age? Economy is in a slump, there is no job security, the job market is inert and pink slips are in. Where does a credit card figure in this gloomy scenario?

There are over five million credit card holders in India. Studies show that every year nearly 1.5 million people join the bandwagon. A study carried out by the Credit Card & Management Consultancy firm shows that the proportion of credit card holders revolving credit has increased sharply from 25-30 percent in 2000 to 35-40 percent this year. Ideally this increase in number would have meant more expenditure, more buying and therefore more selling - a trend which is definitely a good news for any country's economy. But unfortunately reality is something stark and different: this increase in number of credit card holders has only been reinforcing the dampened mood.

After the economy liberalised, the number of choices given to the Indian consumer suddenly increased. There was a sudden boom in the market. There were a wide variety of cars to choose from and the best of houses and apartments to live in. The shelves of shops were suddenly flooded with a variety of gadgets, consumer goods and all those symbols of a good life. With increased salaries, highly disposable incomes and hi-fi jobs consumers too had a lot of money to spend. The doors opened to a more consumer oriented society. The consumer became the king and the market not only pampered his needs but disguised desire as needs. The iron was hot and striking everywhere were the finance firms with credit cards. Suddenly credit cards became available to everybody. One could buy anything one wanted at anytime.

And when money was the issue, came the rationality of owning two or three credit cards. "Why not, they are very useful. You never know when you suddenly need money and in such times credit cards are useful," says Kiran, a marketing executive. This reasoning coupled with a shop-oholic attitude lead to outstanding credit bills running to the tune of Rs 50,000 or about 75 percent of one's monthly income.

...Then the economy slowed down. Companies have started laying off their staff by the dozens. Software engineers are coming back from the beleaguered US market. People who had bought a new car or a new house or some consumer good are suddenly becoming aware of huge outstanding against their credit cards and high monthly installments, without enough resources to pay them back. People have begun to fall into the dreaded Credit Trap. Anxiety and panic has started settling in.

In such a situation, how does one intelligently use credit cards? One has to first understand the symptoms of the Credit Trap and then take steps to avoid any situations that could lead to this trap.

The Credit Trap - 10 Symptoms

• Half of what you earn in going into loan repayments and credit card repayments.
• You've revolved credit on your card for three consecutive months.
• You've missed two consecutive EMI payments.
• Your savings are less than three months' salary.
• Your investments have eroded drastically.
• Your salary has been cut by over 20 percent.
• Your salary hasn't appreciated, but your aspirations have.
• You've changed two jobs in the past year.
• Your company's growth has been falling over the past two quarters.
• Loss of sleep or bouts of depression, courtesy financial worries.

Source: Business Today