Credit can be a powerful bridge between today’s desires and tomorrow’s means, but it must be used with care. At its core, credit means borrowing now and agreeing to repay later, with an additional cost known as interest. Lenders—banks or fintech platforms—charge an annual percentage rate (APR) to compensate for the risk of non-repayment and forgo the opportunity to deploy those funds elsewhere.
In a healthy economy, credit fuels growth. Students use education loans to gain skills, businesses tap working-capital lines to bridge seasonal cash-flow gaps, families stretch EMIs over decades to buy homes. However, when credit is misused, debt piled on high-interest credit cards or personal loans, the same tool that creates opportunities can turn into a persistent burden.
Credit-card APRs often exceed 25–30% annually, turning unpaid balances into a mounting liability. Suppose you have a ₹2,00,000 credit card balance at 30% APR. Let’s see what happens if you are not able to pay the full amount on the due date. Let’s assume the minimum payment is 2% of the opening balance. Therefore, you pay ₹4,000.
After paying the minimum, the remaining amount accrues monthly interest. The remaining amount, or the new principal will be: ₹2,00,000 – ₹4,000 = ₹1,96,000 Now let’s add one month’s interest: ₹196,000 × (1+0.025) = ₹200,900. So, after one month, despite paying ₹4,000, you still owe ₹200,900, an increase of ₹900 due to interest. If you again pay only the 2% minimum on the new balance, the process repeats. Thus, it barely reduces the principal and can let your balance and total interest rise over time.
Pro Tip: Before you swipe your card, remember: if you can’t pay your balance in full each month, high‐APR debt can quietly grow even while you’re making payments. Always run these numbers first. You’ll often find it makes more sense to borrow less or choose a lower‐cost alternative. Responsible credit use hinges on three pillars: understanding costs, maintaining discipline and aligning borrowing with your long-term goals.
First, know your APR and repayment terms. A loan or card that seems attractive on an ad may carry hidden fees such as late-payment penalties, annual charges or high default rates, that transform convenience into a trap. Second, treat credit like a knife: indispensable in skilled hands, dangerous when misused. Always ask, ‘Can I repay this in full by the due date?’ If not, reconsider the purchase or seek a lower-cost alternative. Third, use credit to invest in yourself or essential assets—a degree, a home or a temporary shortfall—rather than funding fleeting indulgences, like an impromptu trip to Bali.
Credit scores, summaries of your repayment history and utilisation of credit, determine not only your access to credit but also the rates you pay. Consistently paying on time and keeping utilisation low builds a strong score, unlocking cheaper loans and premium card benefits in the future. Macroeconomic forces shape credit availability and cost.
When central banks lower policy rates to spur growth, borrowing costs fall, making mortgages, car loans and even credit card interest more affordable. Conversely, in times of rising inflation, central banks may hike rates, EMIs on floating-rate loans climb and credit card charges mirror the market tightening.
Economic downturns can trigger stricter lending criteria, as banks guard against rising defaults. Across the globe, credit cultures differ. In the US, credit card penetration is high, and APRs can soar above 20%, yet rewards programmes entice responsible users. In Germany, consumers favour debit and cash, shunning high-interest cards.
In India, soaring education and housing costs have fuelled rapid growth in personal and home loans, even as credit card adoption remains nascent. Understanding your country’s credit norms helps you benchmark your own borrowing habits.
Also read: Why did Ashoka really invade Kalinga? To control the booming metal trade
When Credit Goes Wrong: Back to 2008
In 2008, millions of Americans had borrowed far more than they could afford to repay, mostly through home loans given to people who weren’t in a position to take them on. When those borrowers defaulted, banks across the world panicked and stopped lending and the entire global economy seized up. When credit is handed out carelessly and borrowed carelessly, everyone ends up paying the price.
Modern fintech innovations such as instant personal-loan apps, buy-now-pay-later schemes and digital wallets, have broadened access to credit, especially for younger and underserved populations. While financial inclusion is to be celebrated, it also demands greater consumer education. Easy approvals can lull borrowers into accepting unfavourable terms. Always read the fine print, compare APRs across lenders and use digital tools to track your outstanding balances!
Ultimately, credit is neither a hero nor a villain. It’s a double-edged sword. In the hands of a disciplined borrower, it unlocks opportunity: funding education, smoothing cash flow and building assets. In the hands of the unprepared, it becomes a perpetual drag: compounding interest, damaged credit scores and financial stress.
By mastering the mechanics of APR, payment schedules and macroeconomic dynamics, you ensure that credit remains your friend, and never your frenemy. Now that we’ve covered loans, EMIs and the real cost of borrowing, it’s time to shift focus.
Whatever you have left over after meeting these obligations forms the foundation of your investable surplus. That’s where the next part of this book begins. We’ll dive into the world of investments—stocks, mutual funds, gold, bonds and more—to help you understand how they work and how to choose what’s right for you.
This excerpt from The Economy is Personal by Anisha Sircar and Dr Nupur Pavan Bang has been published with permission from Moe’s Art.