Best way to use a debit card with a fixed limit

It is being touted as a 'magic card'. Its unique selling proposition: A debit card with a credit limit. The best part: Interest rates at 13-15 per cent are competitive - IDBI Bank's new salary account holders are being offering this facility.

Sounds good, especially to those borrowers who feel they will be able to repay the excess amount in a couple of months.

Useful, too, in the festival season. As R K Bansal, executive director, IDBI Bank, says, "Besides salary account holders, we are also considering offering it to our regular savings account holders. But that would take time."

Working like an overdraft facility against your salary account, the major difference here is that there are no processing charges involved.

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The pre-approved credit limit will typically be twice or thrice your salary. It would depend on the categorisation of your employer by the bank. And, can be utilised for withdrawals at an ATM or payments to merchants, online or otherwise.

While there are no comparable products, many banks offer an overdraft facility to their salary account holders.

For instance, select HDFC Bank salary account holders can get an overdraft equivalent to 50 per cent of their salary. And, this amount can be utilised through cheque issuances, online transfers and even ATM withdrawals.

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As for IDBI Bank's offering, assume your monthly take-home salary is Rs 50,000. At thrice the salary, the credit limit would be Rs 1-1.5 lakh, to kick in only after you have exhausted your entire account balance. The overdraft amount can be utilised in tranches.

The interest payout is 13-15 per cent annually, but charged monthly. It will be calculated on the credit amount availed on a daily basis.

The interest amount will be charged only on the credit amount utilised and not the entire amount, similar to the overdraft facility offered on savings accounts by banks.

The interest levied is lower than that charged by other unsecured loan products like credit cards (36-48 per cent for rollover credit) and personal loans (over 18 per cent and above). It is, however, in line with that charged for a regular overdraft facility against salary accounts by banks (12-15 per cent).

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Credit card users who diligently settle their entire bills each month may get a better deal because they get a free credit period for 40-50 days on purchases. However, if they withdraw cash from a credit card, charges are levied from day one.

Financial planners feel an overdraft facility can be helpful, as this could serve as emergency corpus. But, in the same breath, they also say it should be used sparingly and for short periods.

Too much of rollover may lead to serious financial problems, as the amount will be adjusted against the salary credit.

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If your salary is, say, Rs 50,000 and expenses through this card are Rs 1.2 lakh, you would start the following month with minus Rs 20,000, plus interest burden.

This could seriously hurt your ability to spend and invest in the next month.

As Sadique Neelgund, a certified financial planner, says, "In this product, the individual is sure that the credit will be offset against his salary. He may not worry about piling credit dues. But a continuous interest outgo will affect his finances negatively and may result in a debt trap."