Understanding the Dark Side of Credit

15-Feb-2016 written by : FSI-Team

Like the two sides of a coin, there are pros & cons to everything in life, including Credit. While credit can help you not only in acquiring a product and pay over a period of time, apart from facilitating in achievement of your financial goals, if not managed, credit can lead to severely impacting one’s CIBIL score and CIBIL rating. Read on to know more about the darker side of credit:


“Want to take that vacation abroad? You are now eligible for a pre-approved loan by Your Bank on your credit card” read the sms on Rajan Krishnamurthy’s phone. He read it. And then read it again. Yes! He always dreamed of visiting Europe. His wife had been insisting too as all her friends and relatives had already been on some or the other trip abroad. The offer was just too good to resist. Was it really that good or should he have considered the cons too? This is Rajan’s story.

It could be yours too.

Temptations are aplenty and they surround us in such a way that they have almost become synonymous to our environment. Exercising self control is perhaps the mantra to beat it. Only after closely scrutinizing any offer across all parameters, should one take the plunge. Otherwise, the results of a “not-so-well-planned” decision could be detrimental.

Rajan Krishnamurthy, was an average guy with an average lifestyle but high dreams and deeply influenced by the people around him. There are several pros to using credit. Like, it gives you that financial leverage and makes several things within your reach, makes you feel more financially independent, your business goals may seem more achievable with financial aid and many more. On the flip side, if you do not know where to pull the plug then you may land yourself in huge financial mess. Here are a few points that you must to consider before getting involved with credit.

  • Spending beyond ones means: The greatest problem with credit is that there is no real exchange of money at the time of purchases made. If we take a quick glance at a couple of decades back, when people were less reliant on credit, they would save first and then spend. In those days, when the pile of cash in their wallets began to shrink, an alarm bell would ring for them to rein in their expenses. Unlike that, in credit it is easy to over spend.
  • Lack of knowledge on how to handle credit leads to overexposure: A lot of freshers in the corporate sector are unable to handle their new found financial freedom. Most of them end up making frivolous, impromptu decisions. This approach may work in the entertainment industry but it does not work in the credit world. Most young land up over borrowing by applying for different loans or having too many credit cards. They are hardly concerned about or even aware of its disastrous effects on their CIBIL score.
  • Mishandling credit: Remember, any debt taken or credit taken is that money which you may use but it does not belong to you. In future you must return it. So unless you have a plan of action carved out on how you will return it, your pile of credit will just keep on building. People tend to get stuck in a “debt-cycle”. This is a vicious cycle where one tries to pay off existing debt using more debt. While it may seem to provide you with temporary relief, but the problem at hand remains the same – you are still using credit. And credit needs to be paid off.
  • Do not add to your financial woes: A responsible credit user is one who would only spend what he can pay for at the end of the cycle, in full. Through our experience we can say that many people believe that if they pay only the minimum balance then atleast their credit limit is restored and they can keep using their credit card. But honestly it only leads to larger amounts due in the next cycle. Any outstanding amount due on your credit card carries over at an additional rate of interest which is amongst the highest rates in the industry. One must attempt to pay off in full in every cycle as that way no extra interest is added to your bill.
  • This theory applies to business loans too: Many businessmen are known to have burnt their hands by getting too much credit. Some just follow their gut while others are certain of their “successful” business plans. Alas! It is not so true. The business proposition needs to be closely analyzed and its feasibility should be determined across all industrial, economic, political & geographical factors. Once there is conviction in the success of the proposal, one must invest. Just picking up loans and tossing in the money may not be most workable business model.

For example, one painful chapter of the Indian credit history is the surge in debt-ridden farmer suicides. Yes, it is very sad to see someone having to give up on their life only because they could not repay their debt. But, some of them may have picked up just too many loans which they could not pay back. Lack of proper knowledge on the darker side of credit, perhaps, would have led to this adversity.

It is important to learn valuable money management skills. Our best advice to all our readers and clients is to take baby steps in the credit world. Borrowing is one such thing that can provide you with economic thrust or bury you under a huge mountain of loan. The choices you make will set you apart from others.

Happy Credit to you



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