Beware the Risks: The True Cost of Using Credit Cards for RentPay in India

Understanding the Trend

In recent times, an increasing number of Indians have been leveraging RentPay services to effectively “encash” their credit cards. This trend stems from the high interest rates, typically over 4%, and additional fees (ranging from INR 500 to INR 15,00) charged by banks for ATM cash withdrawals using credit cards. To circumvent these costs, many have turned to RentPay platforms which allow users to pay rent through their credit card. Commonly, individuals route these payments to the accounts or UPIs of friends or family members, subsequently receiving the funds back to fulfill personal financial needs.

The Banking Sector’s Response

However, banks are catching up with this workaround. Several financial institutions have started levying charges on transactions tagged as RentPay. Additionally, they’ve ceased rewarding points for such transactions, diminishing the perks that once made these transactions appealing.

Tax Implications

A more pressing concern is the visibility of these transactions on the Income Tax Department’s portal. With many engaging in transactions over INR 10 lakhs per financial year, the IT Department has begun issuing notices for clarification and details. This development transforms a seemingly innocuous habit of using RentPay to extract liquidity from credit cards into a potential legal and financial headache.

The Lure of Rewards and Cashbacks

Another common practice involves purchasing mobile phones for friends to earn cashbacks and reward points. Banks have adjusted their strategies here too, now offering cashbacks predominantly on EMI-based transactions, ensuring they earn interest over time.

A renowned financial expert poignantly described credit cards as a “slow poison.” Indiscriminate use of credit cards can lead users into a debt trap, a situation exacerbated by clever but risky practices like the misuse of RentPay.

Practical Tips for Credit Card Usage

1. Limit Your Credit Cards: Stick to one or two credit cards that cater to your essential needs. More cards mean more complexity and temptation to spend.
2. Opt for Lifetime Free Cards: Seek out credit cards that offer lifetime free services. These cards often provide cashback on transactions, allowing you to earn rewards without the burden of annual fees.
3. Beware of the Debt Trap: Credit cards are financial tools, not free money. Use them judiciously, understanding the terms, interest rates, and charges.
4. Understand Your Spending: Keep track of your expenses. If you’re using credit cards to extend your spending beyond your means, it’s time to reevaluate your financial habits.
5. Utilize Rewards Wisely: Optimize the use of your credit card rewards. Choose cards that offer rewards aligning with your spending patterns.
6. Be Tax Compliant: Be aware of the tax implications of large transactions. Misusing financial instruments can lead to legal issues.
7. Emergency Fund: Instead of relying on credit cards for emergencies, build an emergency fund. It’s a safer and more financially sound strategy.

Conclusion

Credit cards, when used smartly, can be a boon, offering convenience, rewards, and financial flexibility. However, misuse or overdependence can lead to financial distress. It’s essential to stay informed, act responsibly, and make choices that align with your long-term financial health. Remember, in the world of credit, moderation and prudence are your best allies.