Thursday, February 4, 2010


WARNING: The ideas and schemes discussed in this article have to be understood properly before applied. Short-cuts or alterations can result in heavy financial loses. Applied properly will start you on the path of riches.


Credit Cards are the most misunderstood and misused financial instruments of our times. My attempt is to highlight the positive legal usage of credit cards and through it, the wonderful concept of payment by EMI system.

I was totally thrilled when an idea of mine proved to be right. It all began one day when my credit card company called me up and offered a loan of Rs 1.74 lacs on my card. Since the voice on the other end was very pleasing and pleasant, just for the heck of it I thought of extending the conversation by asking for more details.

It turned out that she was offering an amount of Rs 1.74 lacs for 36 months at 18% rate of interest on reducing balance basis on my card; the EMI would be Rs 6484.21 pm.

I did some quick calculations and was completely surprised by the findings. To be safe I reconfirmed the facts with her and probed for hidden costs if any. Totally satisfied by her response, I decided to take the loan and see what happens. As expected my younger son, who is an MBA, told me "What is the use of asking now? You should have done so before taking the loan".

I had a very sad and disappointed member in the family that day. This happened 2 years back.

Today, on completion of 24 months out of 36months period, my initial calculations are withstanding the test of time, and appear to be correct:

  1. Total to be repaid [36months x Rs 6484.21] = Rs 2,33,432

  2. [Capital] Original loan amount = Rs 1,74,000

  3. Interest paid over 36 months [1-2] = Rs 59,432

The entire loan amount I had invested in 4 mutual funds. These funds over 2 years have appreciated to Rs 2,14,204, thereby giving me a capital appreciation of Rs 39,204, leaving a deficit of Rs 20,000 [item 3 in table] to be covered in the last year of the loan.

The point I am making is that this happened during the period when the Stock Markets around the world had collapsed. In the first year of the loan, I had lost 60% of the original amount, in the second year not only my loss had been recouped, I had recovered 67% of the interest to be paid [item 3 in table above]. This was the time when financial system round the world suddenly went into a spin [2008] and hence things can never be worse than theses.

The so-called 18% rate of interest charged on the loan amount under credit card will be earned back by the loan amount itself, and paid to the card company without any pressure on my finances!

Fouth year onwards, the capital appreciation in these funds is mine to keep. Plus, the loan is all cleared.

AM I NOT RICHER BY Rs 1.74 Lacs (and more...) AT THE END OF 3 YEARS?!!!!

Self discipline to be followed:

1) Never delay in making payment of the amount due on credit card. Better to link credit card for auto payment from bank account. Disputes if any to be resolved separately.

2) Always pay the full amount, never the minimum payable allowed, to avoid the debt trap.

3) Loan amount need not be Rs 1.74 lacs, start with amount you are comfortable with.

4) The first loan should never be for consumption purpose. Always invest it in mutual funds. After completing successfully the first cycle of 36 months, next loan can be used as your personal needs dictate. These mutual funds should not be redeemed as they will be your safety net in the future.

Another area where you can earn sizable amount is when buying a new car. The thumb rule is never pay the cost of the car, or part thereof, from your funds.


Go for maximum loan offered by the Bank and for maximum period. As long as the interest charged by the Bank on car loan is less than 15%, your car will be free of cost to you by the time your car loan EMIs get paid.

Rules are the same as in case of loan on credit card. The entire loan amount or as much as you can comfortably afford, should be invested in equity dominated Mutual Funds. Just like you got your lovely child after 9 months, your mutual fund also needs time to multiply your money.Whatever amount you invest in mutual funds would double in 5 years if not earlier.

This fact is accepted by all financial annalists and commentators and would be the conclusion anybody can draw based on the facts given in my above example on loan on credit card. Do not redeem the mutual funds created as they would make your ‘new car’ then free again. Money you earn from sale of ‘Old car’ should be invested in mutual funds also.

For various other ways to generate wealth from credit cards in small ways, please spend time with my blogs on Financial Planning, especially FINANCIAL PLANNING-SOME TIPS.





Do you think this is the time to exit Indian stock markets?