I had an urgent phone call from my son Akshay about his credit card payment that was due in a couple of days. More about that later. But first let me give some background.
Akshay had the good fortune (or is it misfortune) of growing up with me and the lesson drummed in his head always was that,credit cards,are a great convenience tool as long as you do not overspend and take care to pay 100% of your dues before the due date. In fact during his college days in Pune (I am based in Mumbai) he had an add-on card (see box for what are add-on cards) issued against my own credit card.
The understanding with him always was that this credit card was to be used only for emergencies or for making expenses with my prior approval. However in practise some expenses did creep in on the add-on card (to be fair only on a few occasions), which I paid off as it was billed on my main credit card. What worried me were not the actual expenses as the fact that Akshay was beginning to fall for the allure of the so-called painless nature of making payments by credit cards. Being a personal finance expert it became a challenge for me to provide Akshay the experience on the whole cycle from incurring expenses on the credit card to actually paying it off. Given his profile he was not eligible for his own credit card.
It was not until he had completed his studies and had started working in Auroville (near pondicherry) that I hit on the solution. I got him a credit card from Kotak Bank secured against a fixed deposit made with them. Since the credit limit on such cards is around 80-90% of the fixed deposit amount, it is fully secure and Kotak (and other banks that issue such cards like Axis, ICICI, HSBC) is therefore able to issue it to all those who seek such cards. I made the fixed deposit on Akshay’s behalf but the card was in his name. I also made him aware of the charges and interest that he will have to pay if he delays payment even by a single day. Obviously he would have to pay for these charges from the modest stipend he was earning. I also told him about the Credit Bureau (in fact showed him my own CIBIL report) and the impact any delays in making such minor payments would have on the major,education loan,that he wanted to take after 1-2 years for overseas study.
What are add-on cards?
Card Issuers normally provide a facility to provide additional cards (called add-on) cards to the relatives of the credit card holder. These are issued only at the request of the main cardholder and the liability incurred on these add-on cards is that of the main cardholder. The overall credit limit remains the same and is applied on the main card and all the add-on cards put together. Normally a facility is also provided to the main card holder to restrict the credit limit on a specific add-on card so that he can control which relative is able to use how much of his credit limit. Since the payment of expenses incurred on an add-on card has to made by the main cardholder the add-on card holder does not experience the full cycle of credit card from incurring the expenses to paying off the credit card bill.
Which brings me to the reason for the phone call that Akshay had made to me. Clearly my lessons had worked. The first credit card bill was due in a few days and his card-issuing bank did not have a branch at Auroville. His stipend and the savings that he had from his summer internships were all in another bank and he was worried about how the money was going to be transferred to Kotak in time for the payment. Ultimately we worked out a solution where he withdrew cash from his salary account and deposited it in his Kotak Bank account at Chennai (yes he actually travelled about 160 kms to Chennai specifically to deposit the cash) and then transferred the money electronically from his Kotak Bank account to his Credit card account with them. Although I could easily have found a solution by depositing the money in his credit card account in Mumbai, I let him sweat it out, as I wanted him to internalise the lesson, which he is unlikely to forget in a hurry.
And what did Akshay think was the moral of the story. In his own words Credit Cards are like Swiss knives extremely useful nay indispensable in an emergency but they need to be handled with care or they can cause serious injuries.
What a great analogy Akshay.
What do you think? I would welcome your comments as also any of your own stories on how you taught your children the value of using financial tools responsibly.