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Credit Cards - Free Money or Debt Trapped? Future IQ

11,066 views Wait, is this logic right? • Sep 19, 2025
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Slog Reference: Using Credit Cards Smartly

Description

In this video, we explain how to use a credit card smartly and wisely in India. You’ll learn the top tips to use a credit card responsibly, avoid common mistakes, and take full advantage of the benefits of credit card use. From managing bills on time, understanding interest rates, and using credit cards wisely, this guide will help you build a strong credit score and use your credit card effectively. Perfect for beginners and anyone who wants to know how to manage a credit card wisely in India.

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00:00 Intro
00:47 How does a credit card actually work?
03:30 3 Reasons why credit cards are disliked
06:35 Free money or CC karti main maroon?!?
09:40 How to be a smart cookie?
11:50 What makes the cc industry thrive?
18:36 EMIs - Smart or Stupid?
22:26 Misconceptions about CC

#futureiq #credicard

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Using Credit Cards Smartly

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Transcript

The credit card industry is exploiting you. But there is no reason that has to be true. You can exploit the credit card industry if you use credit cards smartly. Right. H I am very invested in this episode because this episode is going to validate some of my behavior and I would like some validation please. Yes. So we will explain how to use credit card smartly. But before we get to that, we have to explain how the credit card industry works. Yes. And then we can talk about what is smart usage, why it works and then we will even clear some misconceptions along the way. Right.
Yeah. And in fact uh uh this smart usage of credit card will tell you some things that you should be doing but 100% you aren't doing those. So just stay with us. Yeah. So how does a credit card work? Let's start with a simple example. Right? You walk into a cafe, you have an HDFC bank card with you and you pay using that card. Correct? What all happens? Uh money gets deducted from my credit limit and the cafe gets the money that I paid. Yeah. First of all, cafe doesn't get paid right now.
Okay. So, there are five entities involved and you just like simp oversimplified it. Five. Me, cafe money. What else? So you your bank account the one HDFC the cafe the cafe's bank access bank let us say okay which is different from HDFC and then there is the visa network which is sitting in between connecting everybody right or master card or whatever it is so what happens is that when you swipe the card the machine which belongs to access sends a message to access bank saying um HDFC bank card has just it doesn't know right so basically it sends a message saying oh this card is access asking for so much money access then asks visa okay who is the
bank right can you please send a message to them asking for the money visa figures out that it is HDFC bank HDFC bank looks into your account sees your you know whether you have the credit and then sends an approval back right okay at this point nobody gets any money no movement of money it's just noted Okay. Okay. What happens is that at the end of the day, Access and HDFC will settle, right? Basically, Access will have done million transactions involving HDFC and HDFC will have done another million transaction involving access. So, they will just add up everything do total and then say okay you know what HDFC has to give so much money to access
and then that money goes and sits in the not yet not yet. Now next business day access does all the calculations make sure the money has come and then we'll put it in the cafe's account at the end of the second day. So because there are other cards there are other people who have also swiped. So access needs to tally all of those other on this account specifically and the money might not have come. So we'll come to that later on. Money might not have come.
We'll come to that. Okay. But keep in mind that if you pay on a Friday morning, huh? Friday night is when HDFC pays access on a bank level. Yeah. And then Saturday, Sunday is holiday and Monday night is when the cafe gets money, right? So cafe is quite unhappy for 4 days. All right. Yeah. But keep in mind that this is not UPI as in in UPI, right? There are again five entities involved, right? Your app GP, your bank HDFC, the NPCI network that UPI runs, the cafe bank which is access and the cafe app which is probably PTM, right?
But all of them connect instantaneously and when the transaction is approved, money is actually credited into the cafe's account. That is why the cafe loves UPI and doesn't love credit cards so much. Yeah, I can imagine because waiting for my money which I have already given out goods for or services for for 2 days or over a weekend is a bit much man. Yeah. And what do you mean that money might not come? What did you mean there? Yeah. So that's another big difference between credit cards and UPR and even credit cards and debit cards. How?
Okay. Because in a credit card m when you swipe it, the money isn't actually gone, right? There's just a note made. Yeah. Because it's a credit kind of a thing as in there is no money exchanging hands until the end of the month when I pay the bill. Right. Exactly. There if you use a debit card, the money is removed from your account immediately. Correct. Later on, you can't say that, oh, this is not me, right? Yes. But with a credit card like you know 3 weeks later you can say I didn't do this you can dispute the charge and then you know what happens your dispute reaches your bank HDFC and HDFC complaints to Visa right and
then pretty much forces Visa forces access to give back the money to HDFC and HDFC will reverse your transaction. This is called a chargeback right? is called a charge back. What usually access will do is take the money back from the cafe. Correct? On day two they had given the money to the cafe. 3 weeks later money has gone from the cafe. Okay. So that is another reason why cafe is not so happy. Can you guess a third reason why a cafe is not happy with this?
Uh no. Because a cafe gets charged about 1.5 to 2.5% of every transaction. Yes. Yes. And this money gets split between access bank and visa and HDFC. They keep like that's how they are making money from this. Some shopkeepers actually uh apply this as 2% card processing charges. Correct. Yeah. Uh which uh most merchants will absorb as cost of their goods or service. Correct. But some merchants will say no please give us that extra 2% also. We don't want to pay it from our pocket. In the US it is illegal to charge this extra 2%. Okay. The credit card industry has managed to bribe well let's let's call it lobby lobby the government uh so
that merchants can't charge extra right but they add it into their costing so it eventually works out for them the good thing for me is though that I don't have to pay that credit card amount immediately I pay it at the end of the month in a bill. Yeah. In fact not the end of the month. you get the bill at the end of the month and you get another 15 20 days to pay it which means that you get around 4550 days of credit and your money could be earning interest somewhere else and you only pay at the end right so in some sense this is like a free money hack right uh usually in life there is no such
thing as free money this is one of the rare instances where you are actually getting free money so You should use a credit card whenever possible, wherever possible. As long as the merchant is not charging you 2% extra. Correct? If the merchant is doing that, then it's not a good deal. But otherwise, you should do it. The thing to be careful of though is that you better have the money in your bank on when it comes time to pay and you better pay on time. Make damn sure that you pay before the due date.
Do you know what happens if you don't do that? Unfortunately, I do know what happens if I don't do that. So, there are some pretty scary things about that. First of all, the interest that you are you are charged if you don't pay on time, you are charged interest. Correct. And that interest is about 3 to 4% per month. Yes. That works out to about 36 to 48% per year compared to a home loan uh which right now is about 7 12% or less and compared to the interest you get when you put money in the bank, right?
It's like order of magnitude less. So it is insane to pay that kind of interest. But that's not even the worst part, right? You got 50 days of credit, but let's say that you forgot to pay on the due date, correct? Or you delayed it and you paid one day after the due date. You will get charged the entire 51 days of credit. You're paying 5% just for being one day late, which is an insane amount to pay, right? Yeah. But that's not the worst part, right?
The worst part is imagine you have a 30,000 bill and you were supposed to pay it but for some reason you paid only 29,100 okay you might think that you will get charged 4% per month on the 100 rupees but no you get charged the entire interest for 30,000 rupees for those 45 days And then on the 100 you will keep getting charged 4% per month after that. Okay. Not to mention the late fees because you've paid it one day late. Absolutely. So you're paying 5% of 30,000 plus you are paying 5% of 100 plus you are paying late fees.
Which smart usage tip number one is pay on time. Yeah. Pay the entire amount on time. Time. Yes. Never ever leave a balance. Right. Not even a one rupee balance believe me. Sub tip is that do not spend money unless you have money in your bank. Right. Otherwise you will get into trouble like this. Yes. Right. Third tip is that if once in a while you end up paying a couple of days late and you get slapped with this charge, call up your bank and ask them to wave the charge. Usually they will wave the charges, right?
They have. They do. They do. Right. And if you don't do it regularly, they will wave it once or twice is fine. Of course, if you keep paying it late, they'll be like, "Ah, we can't do it every time." Yeah. So, but basically, as long as you follow these rules, you should maximize the use of credit card and then you get the convenience, you get protection from fraud. You can say, "Oh, you know, I didn't do this transaction, so charge it back." Don't do that too much either because then that becomes a whole big issue.
You get of course the 45day credit and the interest on that money and you will get rewards and cash back. Yes. Right. In fact, there are people who put so much effort into figuring out the rewards and cash back and this much 5% off on this here and that that they can make money from credit cards. Right? I do not recommend that. I mean one it is true that you can actually make money this way but it is a lot of work it is a lot of effort and dollar value of your time gets involved check out our episode on this not worth it it's about the thrill of the chase I've said this before it's about the thrill
of the chase the dollar value of the time is spent in acquiring thrill not value for the object that you're purchasing but there's an entire community called CC geeks who like maximize this this extraction from uh the credit card industry. Which brings me to my question. I refuse to believe that this uh is actually hurting the credit card companies because if it were unprofitable for them, they would they would stop it immediately. They must be making money somehow, right? So this is very good thinking, right? I mean, if there is one thing you should have learned from future IQ episodes is look at the economics of the thing. The credit card industry is obviously making huge amounts of profit.
So obviously you can't exploit the credit card industry and there is no such thing as a free lunch. So all these benefits you are getting where are they coming from? Right. Yeah. Uh yeah. So like that's why we went into so much detail about the business of credit cards. Okay. Okay. you are getting a whole bunch of benefits and you're getting cash back and you are getting uh credit and so on. That money where is it coming from? Number one, the merchant fees, right? The merchant is charged 1.5 to 2.5%.
Correct? And the merchant actually absorbs that. So it becomes part of you know the cost of doing business for the merchant. So in some sense the cost price for the merchant has increased by a few percent. uh and they have to manage that in the costing of their product and profit margin. Yeah. Now again at this point if you were paying attention right you should ask yourself but well if the merchant is just going to increase their profits a little bit by doing this ultimately we are paying for it yeah partially not entirely true right because I said don't use it if the merchant is charging you extra separately right which means that most merchants don't
charge you separately right correct which means that to absorb this price the merchant increases the case for everyone, right? Which means that if 10% of the people are using credit cards, the other 90% are subsidizing their cash backs and rewards and convenience and credit. Right. Yeah, that's actually right. Yeah. As a credit card user, uh I am paying a 2% extra cost because a merchant has tacked on those 2% fees, but so is everybody else and they are not using a credit card. H interesting. Yeah. Uh in fact the merchant doesn't have to increase prices by 2%. Right? So just the maths you can do that if only 10% of the users are credit card users and for them you have
to pay 2% extra you can increase prices by just 2%. Yeah. Because you are charging 10x the number of people. Right. So that is what I mean that you get 2% 2% from the 2% usually you'll get cash back and rewards and all that of up to half a percent sometimes 1% if you're very clever 1.5% and if you're extra extra clever you can even get more than 2% right but point is that that money some of it is coming from the merchants there's a separate source right which is that all the people who don't pay their credit card bill in full, right? Those people are paying 36 to 48% interest, right?
Yeah. That money is ultimately the banks, the card companies, the card issuers income so to speak, right? But what percentage would it be? Yeah. So if you look at income of credit card companies, right? about half to twothird of their income comes from the losers who are paying interest. Losers Naven absolutely losers right you should not be using credit card for credit I mean 48% interest that's stupid right find some other way of getting that credit or live within your means right and it's the dumbest thing to use credit card for credit even though it's in the name credit card you shouldn't use it for credit I agree with him I mean I the whole point of this episode is use
credit cards for convenience do not use them for credit. Okay. Yeah, I I I get what you mean. Essentially, I use it as a 0% interest free loan for 45 days. That's how I use credit cards because I pay it at the end of the month, the full bill. Yeah. So, credit card companies the way they are making money is about half to 2/3 comes from the interest paid by the losers and the remaining comes from fees charged to the merchants, annual fees charged to you, EMI fees, etc., whatever. Right.
Yeah. So any cash back that the credit card company is giving you right any rewards that you are getting all of that comes from these two sources of money right the users and the merchants I'm sorry for calling them that but just understand right credit card companies let's look you saw their income where it comes from their expenses about 20 to 30% of their expenses is you know the people who never paid back their credit right I mean just you know just like banks have bad loans banks have mala credit card companies have people who never pay right so 20 to 30% they have to write off and that is an expense okay 20 to 30% of
their profit roughly goes into of their revenues you no not re revenues their income okay their income yeah goes into bad credit right another 20% actually goes into giving you cash backs and rewards and all the other cool things that you get, right? Okay. 10% they pay for marketing and co-branding and all of that. Okay. Around 20% they end up paying they pay interest. Who? Because see they have remember they are paying the merchant in about 2 days and they are getting the money for 45 50 days later.
So until then the money has to come from somewhere right? Usually they will borrow from someone and pay them interest. Correct. Usually that is the bank itself, right? I mean this division of the bank taking money from that division of the bank but for profit accounting purposes, accounting purposes, you have to show it as a loan and there is that there is that entire different banking mathematics account mathematics and whatnot. But I get what you mean. Yeah. So the main point is that when you get cash backs, the bank is actually giving 20% of their income to you.
And that is coming probably 2/3 from the losers and one/ird from the merchants. I still can't get over you calling them losers, but I I get what you mean. But what about people who do buy now pay later and EMI schemes? Would you call that using it smartly? Absolutely not. No, almost certainly not because when so EMI is basically you know you pay for a 10,000 rupee thing and zero interest for 3 months and then after that you have to start paying and things like that.
Yeah, EMIs are tricky. There are hidden charges, right? They might charge you a processing fee of like 1%. Right. Even if they have waved off interest, they will charge GST on the interest that they waved off, right? M plus whatever cash back and rewards you don't get that so that money also goes away and other discounts if there were uh all of that goes away right uh so it in general it is complicated usually they will figure out a way of making money from you on EMI right and also EMIs are basically a debt trap of a different kind because they are training your brain to think in terms of EMIs rather than think in terms of do I have
this money to pay for the product I want. Yeah. See, see, basically we should distinguish between two different things, right? One is just regular EMI where a 10,000 rupee payment right now is replaced by six payments of 2,000. So the amount is more you are paying interest and don't do that, right? Because that interest is going to be really large. Yeah. Right. compared to just regular interest. The thing that entices people is the zero interest EMI. And even that doesn't work because of the reasons uh I pointed out, right?
There are rare exceptions. Once in a while there will be a zero interest EMI which actually doesn't have all of these fees or the total amount is equal or less after factoring all of these. Yeah, there is a way to do it, but uh I'm not going to talk about it here. Message, comment, and probably we'll discuss it offline or something. No, see, one thing I do want everyone to keep in mind is that whenever there seems like there is a very good deal and you're getting free money from somewhere, you have to ask who pays for it, right?
I mean, that has to go into your brain. Never ever go for a deal unless you understand who's paying for it, right? So my question to you is that there is I mean I did this right I once bought a TV and if I used a particular credit card I was actually if I used a particular credit card and if I used a zero interest EMI the total amount was less than what I would have paid. So question is where did that money come from? from the thing that you just explained there are there are losers paying interest and then there is the merchant discount rate which the credit card company takes from the merchants.
Basically what is happening here is that the bank wanted me to learn how to use EMIs so that in the future I will use EMIs a whole lot and I will pay them huge amounts of interest. Correct? So this giving me an actual discount was an marketing expense for them. Correct. Similarly, the TV company or the brand or the store wanted me to buy right away, right? Right away. So they were giving me a discount by reducing their profit margin a little bit. Right? So usually there is a lot of marketing.
Three different companies have marketing budgets that go into these deals. Right? And all of this is counted as CAC customer acquisition cost CAC. Absolutely. Yes. Right. So, but usually that is very rare. So, avoid I mean the simple simple rule is avoid EMI, avoid BNPL, use credit cards but pay on time. Yeah. The paying on time bit is a little tricky because uh uh one of the misconceptions that uh I've heard is that if you pay on time then the banks actually hate you because they're not making money off of you which we just disproved actually right yeah see I mean basically that misconception comes from the belief people have the belief that banks are all making money on the
interest right and as a result if you pay your bills every time then bank is not making any money but that's not true They are making money from the merchants. Correct. Right. 1 to 2%. So they're completely happy with you. Especially if you are going to use credit cards for everything, your bills will be pretty large. And so the merchant commissions that they get will also be large. Yeah. And they'll always keep figuring out ways to make money. If everybody starts using this pay entire bill on time hack, then they will figure out a way to make money elsewhere.
Yeah. But there will always be losers who pay interest. Yeah. No, also keep in mind just look at our subscriber numbers. The number of people watching this channel is so low that we are not in danger of that happening. Okay. But the other misconception that is also tagged along with this is that if you pay your bills on time, your credit score doesn't improve. Yeah. So this is also an urban legend. This is a misconception. This is not really true. Right. Because credit score Okay. Somehow people feel that oh if you are paying interest to credit card companies that is a good credit score right is primarily to ensure that you are not one of the malas of the credit card
industry. Okay. So if you don't use a credit card at all and if you just use cash everywhere then there you don't have a credit history you don't have a history of paying bills on time then they don't know whether you are a mala or not right so that is why that kind of person is not good because you have a bad credit history but if you're using credit cards every month and paying every month on time that actually is a pretty good credit history. So that's not a problem at all.
Yeah. They want to check for two things. One is whether you pay back the money you borrowed on time and two whether you're able to pay interest on it or willing to pay interest on it. And by the way when he keeps saying mala he basically means defaulter. So it's not a direct attack on any Malas out there who are not named Vijay. But yeah those are two misconceptions that are the biggest misconceptions. The other misconception uh is that using credit cards actually causes you to spend exorbitantly and spend indiscriminately.
Yeah. So let's separate that out into two possibilities, right? One is does UPI cause you to spend excessively? If yes, then this is a U problem, not a problem with credit cards, right? Because I mean just because spending became convenient, you're spending too much. uh that's a problem in your discipline your brain and that needs to be fixed using other techniques taught in other episodes. Okay. Okay. So let's come back to okay suppose UPI doesn't cause you to spend excessively but credit cards cause you to spend excessively. M that only can happen if you are using the credit card for credit right so you are spending money that you don't have and the most important thing we said in
this episode is don't do that don't use don't use credit cards for credit right uh so in either case right if you are spending excessively usually the problem is not the credit cards it is the tricks of marketers, right? The sales and marketing people are tricking you into spending money that you don't have or you don't want to spend. And we have a bunch of episodes teaching you these tricks and how to avoid those tricks. Right? Based on uh Chielin, Robert Chaldini's book influence, we did an episode on how sales and marketers are actually tricking you into spending for things that you don't need. So once you clarify all the misconceptions, what remains is the basic which is use credit cards,
maximize the use as long as you are not being charged the extra 2%. But make sure you don't spend money that you unless you have money and always pay the full amount before the due date. Keep a track of your spends. uh keep a track of whether your bank account can handle those spends and uh maximize your credit card usage for convenience not credit and ignore this entire episode if you don't have the discipline to do this until you learn discipline from some of our other episodes. Okay, there are plenty of episodes on the channel from which where you can learn this discipline. But uh along the same lines as the credit card, if you have
been wondering what kind of insurance to buy, we have an episode on that as well. We line that up for you. Go check that out. Shriant Naven, Future IQ.