Wednesday, October 14, 2009

Part 7: Why do we fall for these?

There are several schemes in this world which are designed to enrich everyone but yourself.  There are some things which are akin to cutting your veins, and keeping you comatose till you bleed to death.  There are certain tools which give you lot of power; but used wrongly, could lead to your destruction. Keeping balances on a credit card and paying interest on them belongs to all the above categories.

You want to pay interest at 3% per month? ... that works out to 42% per annum (it is compounded monthly).  You have to earn 61% interest before tax to be able to pay 42% on the other side.  Or, to put it differently, if you invest a lakh of rupees at 42% per annum for 10 years, what would it end up amounting to?  Work that out yourself – keep a glass of water handy.

If you paid only the “minimum” amount due of 5%, and the rate of interest is 3% (per month of course) – how many years would it take you to clear your dues and what would you have paid out by the end of it?  I don’t want to put down the number here – I find it quite horrific.

Did you go and buy that pair of Levi’s jeans on three installments – No way you say, “I can afford my jeans!”  Ok Ok, what about that TV, or that foreign vacation?  Your spouse was nagging you, so you charged your card.  And donated in blood for the rest of the year!

You are just comforting yourself saying you pay most of your dues on time anyway.  All you do is carry forward a “few” balances “sometimes”.  Here is what happens if you do.  Even if you have one rupee as balance on your card beyond the due date, you are charged interest for all fresh purchases from the date of purchase.  And you thought they were giving you a “free” credit period.  How Na├»ve.

The credit card company calls you and offers to increase the credit limit on your card and you grab the offer. Why would you want to, considering that you should not be carrying forward balances in the first place?  If your card were to be stolen, and used for a shopping spree, would you not be protected better if you had a lower credit limit?  More importantly, is not a lower credit limit better for your wellbeing?

What about the rush of power and feel-good feeling of euphoria that you get when you make that impulsive purchase and swipe your card for it? The feeling that you’re on top of the world – that you can afford anything?  Research has proved that you tend to over-spend when you use the card – counting out notes and handing them over, on the other hand, has a very sobering influence.

Just to make you feel better – having a card is not a bad thing at all, provided you pay off all your dues before the due date.  Before moving on to something else let us repeat a short prayer: “Oh Lord, this day I resolve to pay all my dues on time; especially credit card dues.  Forgive me for all my sins and keep me away from card balances. Amen!”

“Spend more to save more!”  “The more you shop, the more you save!”  “The more you spend, the more reward points you earn!”  You see such exhortations all the time.  I don’t think I need to spend time on dwelling on the absurdity of it.

“Become a Purple Citizen” – you are eligible to get a membership card to our store and you get the most exclusive privileges when you shop!  Our gatekeeper will salute you twice!  You will get a cola with crushed ice! And if you shop more than x thousand rupees a month, you will be elevated to Silver category.  Which is when you will look at the Gold member and feel envious – because the crushed ice in her cola is made of Evian water.  Gimmicks to get you back to the store and make you shop more.  The reward points usually work out to a discount of 1 to 2%; and stores that offer such schemes are usually more expensive than the market-street ones by at least 20%.

What about the store in Bangalore which has a “half price sale” for a month at a time every six months?  That place is my favorite shop – I land up there whenever there is a sale.  Don’t glare at me – I am human too!

I used to go to the movies often.  Till they razed all the old cinema halls down and built multiplexes. And raised the ticket prices by a few hundred percent. I still go often, but with greater reluctance – that’s because my wife’s party circuit swaps stories about the latest movies they saw; and my son only likes popcorn when he pays 50 rupees a pop.  The mineral water bottles there come in special sizes: that’s because it is illegal to sell above MRP – so they created a special size with a special rate, just for multiplexes! 

The one-rupee tickets offered by the airlines are great.  Except that the taxes are 2500 rupees.  We have got such wonderful bargains whenever we travelled in the last one year.  My travel spend for the family was rupees eighty thousand this year.  We are thrilled since the journeys were worth at least double that.  The year before that, I travelled as often and spent only rupees twelve thousand – we used to travel by train.

Oh, the frailties of human nature!  And who understands these better than salespeople?

I had a couple more interesting things to share – but I’ve got to run.  We’ve just got tickets to the latest blockbuster in town – free!  Westside gifted them to us as reward for our Dussera shopping.  And did I tell you – the doorman there knows us by name!

Bye for now!


Dinesh Gopalan
Fidelity India Finance
Bangalore
mobile: 9845257313