Things You Want to Know About Credit Cards

Credits cards have revolutionized the way we shop and spend. A simple plastic card can conveniently let us make payments at stores, restaurants, petrol pumps and not worry about the unplanned purchases we might have made. Without doubt credit cards offer convenience. Especially when you're travelling having a credit card offers much comfort. So far good. But for reckless spenders credit cards spelt doom before they saw the trap they had landed in.

How do credit cards work?

When you use credit card at the counter your bill is paid by your bank who issued the card. At the end of the free credit period you must pay your dues to the bank. No interest is charged if dues of the period are cleared by the due date. You might even get a grace period beyond the due date which is interest-free.

Problems start if you fail to make the minimum payment by due date. The remaining amount is carried forward to the next billing cycle. Hefty interest is charged on this amount. This is called revolving credit.

Some credit cards also let you buy on EMIs. No interest is charged if EMIs are paid on time. However the issuer will still charge some fees for breaking up the EMIs. This facility is offered for purchases from select dealers only. Also on purchases with credit card EMIs special discounts are not valid.

Credit card dues can be paid through your net banking savings/current account with the same bank. Alternately you can give a standing instruction to automatically debit a fixed portion of your monthly outstanding from your savings/current account to your credit card account if you hold the accounts with the same bank.

If your bank is different from the credit card issuer you can make transfer through NEFT/Visa CardPay or deposit payment at an ATM of the credit card issuer through cheque or cash or simply drop the cheque in a drop box of the issuer quoting your credit card number. Alternately you can walk in at a branch of the issuing bank and make payment by cash quoting credit card number. 

Credit card charges   

Credit cards mercilessly charge hefty fees from users most of whom never understand how much fee is charged for what. If you've ever tried to figure things out from a bank's list of service charges on credit cards you'll know what we're talking about. Banks can alter these fees any time at their discretion. If you keep NPAs aside credit cards are among the top revenue makers for banks.

Here are some ways credit card issuers make money out of you:

  • Joining fee

For joining their league issuers will charge you fees of a few thousands. Due to intense competition among various issuers this may be waived subject to conditions and some have even done away with it completely.

  • Annual fee

A few thousand rupees have to be coughed up every year as annual fees. Fees for the first year and consecutive years may be different. Some issuers may waive off fees in the first year and under certain conditions waive off the renewal fees paid year after year.

  • Transaction fee at ATMs

If cash is withdrawn against your credit card account at an ATM a minimum of Rs 300 or a rate or 2-3% is charged. No fee is charged for withdrawing against your bank account with a credit card but if you do this while you are abroad you end up paying a fee of a few hundred rupees.

  • Repayment cheque/cash pick up charges

If repayments are made using cheques dropped in at cheque boxes they charge you a fee for collecting them. A few complimentary collections may be offered in a month. Similarly cash payments made at cheque boxes attract a fee. These charges will be billed to you in the following month of the transactions or services.

Out of town cheques may be charged an additional amount for processing. Moreover if your cheque bounces or payment made through NEFT/other electronic mode is unsuccessful or if standing instruction for payment from your bank account is dishonored a fee a few hundred rupees is levied on you.

  • Overseas transaction fee  

Credit cards come in very handy when you are on a trip abroad. But not everyone is aware that every overseas transaction is charged 3.5% as currency conversion charge. If the merchant youre purchasing from is registered abroad but located in India this currency conversion fee is payable.

Now we come to those fees that bleed the finances of indiscrete users.

  • Finance charges

That's the killer interest they charge you on the credit extended over the agreed amount each month. An interest of approximately 3% per month or 36% per year is charged on any outstanding credit. You read that right! You wouldn't ever dream of taking a loan at such high interest rates to purchase clothes or gadgets. But credit cards are exactly that; they're a form of unsecured loan.

  • Minimum payment due

Every month you're expected to pay back at least a minimum of 5% of your outstanding credit subject to a minimum amount. The minimum may vary with issuers.

  • Late payment charges

A fee subject to a minimum and maximum amount charged as a percentage of the minimum payment due is charged for payment not reaching the bank before the due date. For instance HSBC Bank charges 50% of the minimum payment due subject to a minimum of Rs 400 and maximum of Rs 750.

  • Over limit fee

For all credit extended to you beyond the agreed amount a fee of a few hundred rupees is billed. For instance it is Rs 500 in many banks.

Considering all these fees assume you have an amount of Rs 5000 outstanding in a month and you incur no more spends in the succeeding months. If you pay back just the minimum amount due each month it would take 3.5 years to pay back the entire amount considering an interest of 3.25% per month. Were sure youve resolved to be discreet with your credit card spends from now! 

Finally if you decide to take stock of your finances and get things right and forget about the credit cards for a prolonged period, say a year, they could even punish you for inactivity with a fee. There are a dozen of dirty credit traps that one could fall in with credit cards so before you go in for one read the service charges section five times!

Choosing a credit card

Buy a card that suits your need. There are airline cards, shopping cards and such other theme cards that offer benefits and rewards on those activities. Look for a card whose charges are less. Choose a card type that is widely accepted. Go for a card with long credit period. The longer it is you get the safer you are.

If you never had a problem keeping your spending on check and paying bills on time, credit cards are good for you. Otherwise debit cards would be your best choice.

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