How credit cards work in India and why you should use them

I remember applying for my first credit card on Day 2 of my job after college. ICICI bank at the time had a black, platinum credit card that they were offering.

The guy however told me to come back after three months – they needed three salary slips from my current employer as I was not in Infosys or Wipro (guys at these companies got credit cards on the basis of  their offer letters).

I did, and had my first credit card finally. Good decision too — as six months later, I had quit my job and started a start-up (sounds funny now) – and no bank would give me a credit card then.

This was back in 2007.

Almost ten years later, even after the demonetization thingy, there are quite a few folks who are just getting a credit card and even then, are super hesitant to use it.

There are many bits of misleading information doing the rounds due to which people shy away from getting one – or using one if they have it.

I hope that after reading what I have to say, you will be more inclined to get a credit card or start using the one you already have.

Why credit cards make sense

Credit cards are by far, the safest way to make purchases – primarily because the entire channel is validated. The merchant who is accepting credit card payments is approved by a credit card company and also has to maintain a deposit with them.

Here are some reasons why paying via credit cards are a no-brainer.

Buyer Protection

In today’s world, buyers have extremely strong protections.
Even if you buy something from an extremely untrustworthy website (and I have on occasions) and your goods don’t arrive — all you need to do is call your credit card company and file a dispute.

They will open an investigation and if they find your claim to be true, the money is returned back to you.

Depending on the credit card company, you will have somewhere between 30 – 60 days to file this claim.
While the claim is in process, you (mostly) do not have to pay the money to your credit card company.

Which other mode of payment gives you this level of security? If you pay via debit cards, the money is gone from the bank and very often, there is very little the banks can do to help.

Theft Protection

Most of the good credit card companies will have some sort of theft protection which they offer because they have their own insurance.

If you are on a trip abroad and your wallet gets flicked and the thief buys stuff with your credit card, the credit card company will waive this off provided you notify them of the theft within a day or so.

The onus on verifying the card is with the merchant and when this happens, the card company will mostly just pull the money back from the merchant.

So, you are absolutely safe. Imagine this happening with stuff like cash or debit cards.

Reward Points and other offers

Almost every credit card company will offer you some sort of reward points for making transactions on them. They are able to give you reward points because they charge the merchant a transaction fee when you swipe your card. This is generally between 1 – 3%

Personally, using reward points accumulated, we have flown to places free of cost and stayed at 5 star hotels for free.
(Long story short, if you spend around 5L on an American Express Platinum Travel card in a year, you would have flight tickets worth 10K and a Taj Holiday voucher worth 10K in addition to having some more points to spend).

Lots of credit cards will also give you free movie tickets every month and other benefits like hotel and restaurant discounts on top of reward points.

As a customer, you have not spent anything additional – but have reaped benefits. So, why wouldn’t you do it?

The actual credit

If you plan your purchase correctly, you can get upto 50 odd days of credit on something you just bought. (For example, if you buy something on Day 1 on your credit cycle,  you have 30 days of the month and an additional 20 days of the following month to make the payment).

If you have just bought flight tickets worth Rs. 1L, and kept the money even in a fixed deposit (giving you 6.5%) and pay the bill after 50 days, you would have made around Rs. 800 — which is essentially free money.

Keep track of your expenses in one place

The credit card statement at the end of the month lists down all your expenses in one place. You have to maintain this yourself if you use cash.

How credit cards work

Behind the scenes, when a merchant swipes your credit card and you put your PIN number in, the credit card company informs the merchant whether you have enough credit available in your account.

Till this point in time, no money has actually transacted.

The merchant then needs to ‘collect’ the charge at the end of the day (usually).
So, if there is an issue with your product or anything,  the merchant can simply cancel a transaction even after you have put your PIN in and received the payment SMS.

In some cases, the merchant will simply not collect the charge and after 7 days or so, this gets automatically refunded.

You do not pay the amount for an un-collected charge – so you are protected at that point as well – incase the merchant runs out of stock or cannot procure the goods for your order.

Plus, due to the merchant requiring to keep a deposit with the card company, it is much easier to reverse a charge and get your money back.

And in the worst possible situation in which the merchant disappears after taking your money, the credit card company has insurance and you will rarely need to pay anything for a bad transaction.

Still with me? Awesome!
Next section contains tips on picking out a credit card.

Tips on getting a credit card

Salaried vs Business

I have found that it is much easier to get a credit card if you are salaried versus if you are a business owner. Especially if you are a new business owner – some banks may still offer you a credit card, but with a lower credit limit.

So, if you are in a job and plan to quit soon, make sure you get a couple of credit cards before you do so.

Credit cards attract more credit cards

At one time, I had over 7 credit cards from different banks even when I was doing my startup simply because I had an existing credit card.

Most credit card applications will ask if you already own a credit card and if you do, your chances greatly improve on getting a new credit card.

However, having many credit cards is generally not recommended as it affects your credit rating (CIBIL).

Free versus Paid

I have found that the paid credit cards offer a much higher value.
Sure, you don’t pay anything for a free card — but then you don’t get back much as well.

For example, an ICICI bank Rubyx card which costs 3,500 bucks to get gives much better points conversion than the free card they offer. In addition, you get stuff like airport lounge access (each access costs Rs. 1,000 if you pay for it) and the starting bonus is a pair of Sennheiser headset worth 3K.

So, overall, I would highly recommend getting a paid card if you can afford it as the payback is significantly higher if you move all your purchases to the credit card.

How many cards should I own?

I think you should have 2 credit cards to be really safe. Try to get cards from different providers.
For example, you should try and get an American Express and either a Mastercard or Visa.

Not all stores accept American Express even though it has great benefits – hence you need a supplementary Visa or a Mastercard.

Get supplementary cards for your spouse / family

It makes sense to get supplementary cards for your spouse rather than getting them a separate card as the points add up on the same account for all supplementary cards.

You may have lower limit overall (because the limit is shared between the cards) – so it makes sense to get 2 different cards with 2 supplementary ones for the both of you.

Things to watch out for

Paying bills on time

Most credit cards will want you not to pay the entire amount by the due date.
The balance amount left is shown as a personal loan and the interest rates can be brutal – 2.5 – 4% a month (i.e upto 48% a year) on the remaining amount.

The only way you can use a credit card to your advantage is to always pay the entire amount by the due date.

Never get into credit card debt. Not only will they take you to town with their interest rates, your credit rating will also be hit.

If you can’t afford to pay for something a 100%, you should probably not be buying it.

International transactions – 1

Most international websites will not have an OTP mechanism. So, payments go through just by giving your CC number and CVV + expiry date.

If you do not see yourself buying anything internationally, it might be worthwhile to call the bank and ask them to block all international transactions on your card even if your card is international by default.

International transactions – 2

Remember that your credit card company will charge around 3 – 3.5% as currency conversion fees when you spend on anything in foreign currency. So keep that in mind while doing transactions.

International travel

If you happen to travel out of the country, it makes sense to call your credit card company and inform them on the dates and countries of travel. They generally add a note to your credit card asking their fraud prevention team to allow international transactions.

Once, my credit card was blocked while I was billing at an Apple store in the US leading to an embarrassing situation.
(Ironically my debit card worked and I was able to complete the purchase)

Never withdraw money from the ATM

Most credit cards will allow you to with draw some small amounts of cash from any ATM – around 10 – 20K depending on your limits.

The credit card company will show this as a personal loan and charge between 3 – 4% interest per month on the amount.

So unless you are in a bad situation, always avoid doing this even if convenient.

That is about it! Happy credit card shopping!

I hope this post has been helpful and if you have any questions, please put them in the comments and I will definitely help you out.

How to hack your home loan

Please note: Though this post talks specifically about a home loan, it is applicable to any type of loan. I only speak of a ‘home’ loan as I have experience there.

Please note #2: All the calculations that you see below have been made by the super-awesome Home Loan Schedule calculator that I wrote a few years ago and something you should check out and bookmark.


So, you have gone ahead and taken a home loan and are looking dejectedly at your bank balance which will never see the highs that it had — just before you put the 20% upfront (required in India). Don’t worry – we have all been there.

I have some good news though – things will get better after a while :)

I will try to share some insights and tips that I learnt while we tackled our home loan.
Recently, while speaking to some friends regarding their loans, I realised how uncommon this knowledge is – so decided to write a post and share what I know.

Some jargon that will be used in the post

  • ROI – Rate of Interest (the interest rate that you are paying).
  • Principal – The amount of money you require the loan for.
  • EMI – Equated monthly installments – the amount of money that you need to pay back to the bank every month.
  • Part payment – An amount of money that you pay off more than the required EMI.
  • Pre-payment – The amount you pay and the process of closing of the loan by making a final lumpsum amount which equals to the balance principal amount to be paid.

Things to keep in mind BEFORE you take your loan

If you are still thinking about who to take a loan from, some places are better than others.
Everyone will offer you more or less the same interest rates today – but some have better features than others. So always look around and find the institution that has features which will make your life convenient.

During our time, Axis bank had no pre-payment charges and was okay with you moving your loan to another bank at no additional cost.
All other institutions will charge you a 2% penalty when you try and switch your loan to someone else.

ICICI Bank (with whom we ended up going) provides a nifty feature by which you can call them over the phone and make a part-payment every month in under 10 minutes (up to a certain amount).
This saves you the hassle of going to the bank and sitting across a person who will take 30 minutes to do the same if you are lucky.

SBI always has the best rate of interest but I have found dealing with them to be extremely tedious and something I have really avoided since my college days (I had a student loan with them at the time).

So look around and see what features you will require.
Remember that you can always negotiate your terms with the banks even if they are not part of the normal plan as the banks are quite desperate to hand out loans to people with good credit rating.

Banks versus other Financial Institutions

Please keep in mind that there are many places were you can get loans. These generally come under 2 categories – banks and home-loan institutions.

Examples of banks will be ICICI, Axis, SBI, PNB, etc.
Examples of institutions are LIC, India Bulls Home Loan, Reliance Home Finance, HDFC, etc.

As a caveat, remember that even though HDFC has banks, its home loan department is a separate entity and does not come under a bank.

When we were taking a loan back in 2010/11, different rules governed banks and institutions when it came to loans and we decided to focus on banks as the rules seemed more transparent and governed heavily by the RBI.

Please keep this in mind and do your home work. Financial institutions like LIC, HDFC, etc (from experiences shared with me), tend to be less transparent with their interest rates.

Will the Rate of Interest go up or down?

Hmm… When we took our home loan, we were paying 11.5% (which was the standard at the time).
At the time of writing this post, my friends are taking loans at 9.4 – 9.5%

What my loan advisor explained to me was that even though 11.5% was on the higher end at that time, the good news was that it would go only lower.

It all depends on the economy and the growth rate. So, expect your loan to fluctuate between 9% to 12% depending on how we are doing as a country.

There was a time when ICICI was offering loans at 7% and I have heard of rates going as high as 14% – but I feel those days are behind us.
With so many people buying houses now and RBI playing big-brother, things seem to have settled down.

How much does a 2% change in the interest rate affect you?

  • Loan of Rs. 50L over 20 years (240 months) @ 9.5% ROI = Rs. 46,606.56 per month
  • Loan of Rs. 50L over 20 years (240 months) @ 11.5% ROI = Rs. 53,321.48 per month

So you effectively pay Rs. 6,715 every month for a 2% increase

How loans work?

Apart from the simple principle in which you borrow money from the bank and pay that and some more back, home loans work in a peculiar way when you start repaying the monthly installments.

Banks will always try and recover the interest component of their loans first.

To see what is really going on, you need to take a look at your amortization schedule.

Say for example, you are taking a loan as follows:

  • Loan Amount: Rs. 50,00,000 (50 lacs)
  • Rate of Interest: 9.5%
  • Tenure: 20 years (or 240 months) – the standard tenure nowadays
  • Start Date: 1-Jan-2016

This works out to an EMI of Rs. 46,606.56

If you will look at your amortization schedule, it will look like this:

Amortization Schedule

As you can see, the bulk of your installment goes into the interest component.
So after 1 year, you have paid the bank Rs. 5,59,278 but the actual loan amount paid is Rs. 88,046.94 (16% of the amount paid). The rest of the money or Rs. 4,71,231.78 (84% of the amount paid) goes as the interest component to the bank and does not help in reducing the loan amount.

So at the end of year 1, you have paid the bank close to Rs. 5.6L but your loan has reduced only by Rs. 88K

If you go down further and see how your year 5 looks like, there isn’t much improvement.

Amortization Schedule - 5 years

  • You pay: Rs. 5,59,278
  • Interest: Rs. 4,30,721 (77% of amount paid)
  • Principal: Rs. 1,28,557 (23% of amount paid)

Total paid at the end of 5 years / 60 installments is:

  • You pay: Rs. 27,96,390 (~ 55% of your home loan amount)
  • Interest: Rs. 22,59,662.83 (81% of amount paid)
  • Principal: Rs. 5,36,730.74 (19% of amount paid)
  • Load pending: Rs. 44,63,269.26 (89% of the home loan amount taken)

That means if after 5 years of paying the loan, you win a lottery and decide to pay back your 50L loan, you will still have to pay Rs. 44.6L to the bank.

So how much do you actually end up paying the bank over 20 years?

Loan Paid over 20 years

Rs. 1,11,85,574.25

Or Rs. 1.11 Crores on a Rs. 50L over 20 years!

How do I beat this thing?

There is a very simple way to beat this and unfortunately, this is not very common knowledge.

This is the most important bit – so read carefully.

The biggest damage that you can do to your loan is in the first few years while the interest component percentage is at the highest. As time goes by, this tends to get less and less effective.

Option 1: Increase your EMI

Once you have paid your first monthly installment, head over to the bank and ask them to bump up your EMI to whatever you can afford.

I’ll show you a simple example of how this will have an effect.

From our earlier example of a Rs. 50L loan / 20 years @9.5%, the EMI comes to Rs. 46,606.
If you can even afford to pay Rs. 50,000 – i.e. approximately Rs. 3,400 more from month #2 onwards, this happens:

Change in EMI to 50K

Your tenure is reduced from 240 months -> 200 months
That is, 40 months are shaved off your home loan and you are now paying the bank a total of Rs. 99.6L (approx) versus Rs. 1.11 Crores earlier.

A saving of Rs. 12.26L overall or 11%

If you say you can afford to pay a little more – say Rs. 55K (instead of Rs. 50K), this is what happens:

Change in EMI to 55K

Your tenure is reduced from 240 months -> 162 months and you pay the bank Rs. 88L instead of 1.11 Crore and save a whopping Rs. 22.9L in the process (20.50%)

How does this work?

If you compare the original payment schedule and the new one, can you spot the difference?

Amortization Schedules Compared(click for a larger image)

Basically any excess that you pay over your existing EMI, goes directly to your principal.
So where earlier, you were paying only Rs. 7,000 odd per month against your principal,  you are now paying Rs. 15,000 which really eats up your principal and reduces the interest and hence the tenure.

This is the magic of compounding interest and how you can use it to your advantage.

Option 2: Make part-payments

Some banks allow you to make part-payments which are equivalent to one month’s EMI or more while others have no such restriction. (You should find out what your bank’s policy is.)

So whenever you are able to save up some money, put it in the loan. It REALLY helps killing that loan off.

Say you are able to save up Rs. 1L at the end of the year and you make a part-payment. What happens?

Part Payment of 1L

As you can see, making a part-payment of Rs. 1L in month #13, cuts down your tenure from 240 months to 228 months. A saving of 12 months of paying EMIs or basically Rs. 4.72L by paying 1L earlier.

Hence, in addition to increasing your EMI, if you make part-payments, that really helps in killing your loan.

Should I save up for part-payments or increase my EMI?

Say for example, you can save 1L additional every year. Does it make sense to part-pay 1L at the end of the year or increase your EMI by Rs. 5K?

It definitely helps to increase your EMI as the extra money you pay cuts into the principal every month and the compounding principal helps you pay lesser every month compared to waiting for 12 months and then making a lumpsum payment.

However, the goal is to do either or both. Whatever you can afford. It does not matter as long as you are making some kind of additional payments.

Reduction in tenure versus EMI?

Whenever you make a part-payment, the bank will ask you whether you want a reduction in EMI or in tenure.

It is ALWAYS better to ask for a reduction in tenure. Reduction in EMI will keep giving the bank interest for extended periods of time and is not beneficial to your cause at all.

However, there may be some special circumstances under which you would want to reduce your EMI for some temporary relief. In those cases, after making a part-payment, you can ask your bank for a reduction in EMI. However, this should be the exception rather than the norm.

Some final notes

Every bank is different and they have their own weird clauses.
So if you want to follow any advice from this blog, I would highly recommend checking up with your bank first.

There could be a clause that you cannot reduce your EMI once you increase it to some level or that you cannot make part-payments for the first year, etc.

You have to do your homework and spend sometime with customer care to get your doubts cleared.

Some Examples

The following Google Sheet contains examples of the following:

  1. Schedule for 20 years with no part-payments
  2. Schedule for 20 years with increase in EMI to realistic levels (depending on job promotions, etc)
  3. Schedule for 20 years with part-payments
  4. Schedule for a non-aggressive, realistic home loan payment (increase in EMI and part-payment)

Spreadsheet: https://goo.gl/qcyPLn

The Calculator

After learning about the amortization schedules and the way this works, I wrote a calculator to help myself with this. You can find it here:

http://calculatehomeloaninterest.com/

I would highly recommend you play with it and find your own sweet spot. If you stumble upon any errors, please do let me know (though I have verified the calculations with my banks schedule and they match up).

The table generated can easily be COPY-PASTED into excel for further analysis, etc.

Hoping this post has been useful to you. Happy home-loan-hacking!

How to disable the data usage flash messages on the Idea Network

If you are on an IDEA network and have a post paid number, you’ll notice these highly annoying data usage flash messages everytime your phone disconnects an active connection.

To get rid of this, simply dial:

*121*46#

To activate this again, dial:

*121*45#

If you simply want to check your data usage, you can dial:

*121*44#

This will show you your current limits but will not enable the messages again.
Hopefully this information is useful to some folks.