Thread by @soicfinance

Revolver Loans & Credit Card Dues🧵
#BEWARE

6 Bullets of Revolver Loans 🔫
1. What is a Revolver Loan?
2. Any examples?
3. Don’t I have to pay just the min amount?
4. But I don’t have the cash flow.
5. What about my credit score?
6. Wait, wasn’t a credit card for convenience?

First, let’s understand an old proverb, ‘excess of anything is bad’. Anything & everything that has been developed, discovered or invented has 1 core limitation. When used or consumed in excess, no matter how beneficial it could have been,

it will raise its head like a cobra & can strike with lethal venom leaving one paralysed or slain.

Credit too in whatever form if used for accretive purposes can be a boon & a curse if squandered away. That is where one needs to be watchful & decide their fate.

Let’s dive in & understand:-

1. What is a Revolver Loan (RL)?

If you use a credit card, you are probably familiar with what a RL is but maybe you have little understanding of what you are dealing with.

It is a form of credit that you can borrow on an ongoing basis having an interest rate, a limit & a monthly payment. It allows you to borrow money repeatedly upto your limit & repay over time.

RLs are different from fixed term loans. In a fixed term loan, you borrow an amount which you pay off with EMIs set for a fixed no of installments. You don’t have an option of borrowing in parts or repeatedly.

These types of loans are generally for specific purposes like buying a car, house etc.

2. Any examples?

The most common example of a RL is a credit card balance that keeps on revolving month to month (though it is a very bad idea to do this). It is one of the most expensive types of credit source available.

Interest rates charged on credit card outstanding balance can be as high as 42% p.a. or higher in many cases. Please check the table below for details of interest rates charged by some of the leading credit card issuers.

3. Don’t I have to pay just the min amount?

This is the most enticing & expensive convenience credit card companies or banks offer to their clients. They want you to spend the max amount of the limit they have provided & repay the min amount due (MAD) out of the total amount due

(TAD) from your credit card bill. MAD is 5% of the TAD in most cases. So if your bill amount is say ₹10,000, MAD for your bill is ₹500. Let's understand the consequences if you only pay MAD or anything less than the TAD.

Suppose you decide to pay ₹500 (MAD) till your due date. This will trigger the clause that will allow your credit card provider to charge exorbitant interest on your balance coupled with hidden charges.

Further it will allow them to start charging interest from day 1 on any subsequent spends on your card. It will even eliminate the interest free period that was used to sell you the credit card.

Now let’s suppose you like to clear your bills but somehow misread the amount & cleared ₹9,900 out of the ₹10,000 TAD (difficult to assume but please play sport). What is ₹100 in today’s time & age?

This ₹100 left unclear on your credit card bill will lead to second and third order consequences. Assume the bill date to be 28 Jan & due date as 15 Feb. You being oblivious of the error committed spend ₹5000 more on 5 Feb & another ₹10,000 on Feb 10.

Now when the next bill gets generated on 28 Feb you’ll be paying interest charge on not just ₹100 pending but also on the new spend of ₹5000 & ₹10,000 from the day 1 (₹15,000).

Take 3.5% per month and the extra interest + GST you’ll have to be somewhere close to ₹400. So ₹100 left unpaid for maybe a month will make you pay ₹400 extra as the new transactions will attract interest from the day they were made.

Formula used to calculate the interest is (Number of days counted from the date of transaction x outstanding amount x Interest rate per month x 12 month)/365.So in a nutshell you must, absolutely must pay your credit card bill in full.

Even ₹1 left unpaid can lead to an adverse consequence.

4. But I don’t have the cash flow.

Tough & testing times can knock on anyone’s door without prior appointment. It’s better to be prepared but many times we can’t anticipate the degree of the onslaught.

This may make us spend haphazardly on our credit cards, maxing them out. Under this situation too it is better to clear the credit card bill in total & not revolve the loan.

There are good options available as alternate routes to credit. One such is getting a personal loan from your bank to clear your credit card due. It is a clear case of Revolver Loan vs Fixed Term Loan.

The cost you will incur on a revolving loan will far outweigh the cost you will pay for a term loan. A personal loan may cost you around 18% but will be far cheaper than a revolver loan on your credit card.

One can also apply for a loan against mutual fund holdings that may be as low as 10%. Also there are many startups that are offering cheaper loans, these can be highly beneficial to clear your credit card loan. (Better not to revolve it in the first place).

5. What about my credit score?

RLs can have a fairly bad impact on your credit scores. Your credit use will ascertain the ratings you will likely get. Suppose you have a limit of ₹1,00,000 & you have made spends of ₹80,000, this simply means your credit utilization is 80%.

Your credit score will suffer, if you are revolving this amount, it will keep standing as due in your profile impacting adversely your credit scores. Ideally one should aim to keep credit use under 30%.

Along with that, falling behind on payments - even min payments can dent the

credit score. Payment history is the most important factor in a credit score. But on the other side revolving credit can be used to build a credit history & a solid credit score. If one is just starting out & has no previous record of credit, revolver loans can be pretty handy.

As one can spend as per their pocket & pay timely to keep building a clean credit score.

6. Wait, wasn’t a credit card for convenience?

A credit card or leverage of any sort is for convenience only. It is how we use this convenience that decides if it's a boon or a curse. Leverage is like a magnifying glass, if the going is good,

good will get magnified & if the going isn’t smooth, ill effects get magnified leading to collapse. Credit cards can be very handy as they allow us paperless transactions & ease of keeping record of money spent.

Along with this ease there are a whole host of perks that different credit cards offer as per their category.

One needs to assess their spending needs as there are different cards offered for travel, grocery, fuel, online shopping etc. If one has a large family & often needs to spend on groceries, a card having offers & cashbacks on grocery shopping can be very useful.

It can offer a lot of savings with instant discounts, cashbacks & reward points. As an ending note we would like to remind you that anything if used judiciously can be highly beneficial as it meets its intended purpose.

If use is blown out of proportion & affects the financial health of users it’s better to stick to old ways of spending money.