Know Your Credit Card

Credit card which is often called as plastic money has nowadays almost become a necessity for some. It is easy to carry and transact. At the same time if it is not managed properly it can become a liability. Many people are not aware of the consequences of mismanagement of credit card purchases. As it is easy to operate and there is no immediate empting of your pocket it sometime leads to impulse buying. You need to manage the purchases by credit card in such a way that it really becomes cost effective and frees you of tension of carrying huge cash all the time.

But it is necessary for one to know certain charge structures of credit cards so that it becomes beneficial rather than a burden-a liability.

Joining Fees, Annual Fees and Supplementary Card Fees

To start with as far as fees are concerned, there are joining fees, annual       (maintenance) fees and Supplementary card fees ( add on card for say one’s wife or husband as the case may be).The joining fee varies from bank to bank and also as per the card rating. Though the card joining fees vary from Rs 1000 to 25000 pa, many banks waive off all the fees for their loyal customers. Some banks also assess the total spend on a particular card and if it is less than mandated, the bank may reverse the fee for the subsequent year.

Finance Charges

The finance charges are nothing but overdue charges on extended credit and interest on cash advances. Here also it varies from bank to bank and as per the type of cards. One must be aware of the charges as they are heavy. The charges vary from 18% to 40% pa and one has to be very careful about the repayment within the allotted credit period. Apart from interest on cash advances, fee is charged on the cash transaction also. It also varies from 2% to 3% subject to minimum value of say Rs 150 to 300. Then there are late payment charges, over limit charges, return of cheque charges, auto-debit return charges, outstation cheque processing fees, card replacement charges, transaction fee on EMI charges and service tax ( as applicable from time to time, presently 12.3%).

Interest Charges

This is extremely important. Interest is charged if the total amount due is not paid by the payment due date. One must note here that Interest is charged on the Total Amount Due and all new transactions (from the transaction date) till such time as the previous outstanding amounts are paid in full. Also, interest will be levied on all cash advances from the date of the transaction until the date of payment. The rate of interest here is changed with the sole discretion of the bank. It can be as low as 24% per annum or 2% per month and depends on factors such as, but not limited to credit history, purchase patterns, payment behavior, loyalty etc. In case of default, banks can increase the interest charges up to a maximum of approx. 40% per annum and that is really a huge amount. The following illustration will indicate the method of calculating interest charges (taken from ICICI Bank Credit card terms and conditions…)

Transaction

Rs

Purchase on April10,2009

2000

Total Amount Due on statement dated April 15, 2009

2000

Minimum Amount Due on statement dated April 15, 2009

100

Payment Due Date-May 3, 2009

Purchase on May 7, 2009

800

Payment on May 10,2009

1500

On statement dated May 15,2009, following interest charges will be levied: Interest calculations @ 40.80% per annum
a) Interest on Rs 2000 for 30 days ( from April 10 to May 9)

67.07

b) Interest on Rs 500 for 6 days ( from May 10 to May 15)

3.35

c) Interest on Rs 800 for 9 days ( from May 7 to May 15)

8.05

Total Interest charged in the statement dated 15th May

78.47

Service tax will be applicable on interest charges.

There are late payment charges also. If the Minimum Amount Due is not paid late payment charges would be 30% of Minimum Amount Due subject to certain limit which could be as low as Rs 400 to as maximum as Rs 700. So if you don’t pay minimum amount or pay less than that you are bound to be charged the late payment charges. Also, please note that if the minimum amount is not paid then there will be no interest-free period and credit card’s main advantage has gone for a toss.

The Minimum Amount Due is 5% of the outstanding or such other amount as may be decided by the bank. In most of the cases the Minimum Amount Due includes unpaid Minimum Amount Due of the previous statements, if any. Interest is charged if the total Amount Due is not paid by the payment due date even if Minimum Amount Due has been paid. Is it not becoming a bit dicey now? Read further, if you spend Rs 5000 and pay back exactly the Minimum Amount Due (subject to a minimum payment of Rs 100) every month, it will take you 78 months (6 years and 6 months) to pay back the total amount! Therefore it is advisable that whenever your cash flow is better; pay back an amount substantially more than your Minimum Amount Due.

A client of mine had an outstanding of Rs 200000 on credit card before I met him. He said that he was paying almost Rs 8000 every month for last so many months ‘ lekin ye bill he cum nahi ho raha hai..’(But the bill does not seem to reduce). I had to explain him the situation and we took out the amount (equivalent to the outstanding) from his PPF accumulation of 14L (earning 8 % per annum) and paid back the outstanding in one shot. The amount Rs 8000 saved pm is amount earned now. He invests this amount in SIP every month. After 6 years and considering the CAGR as only 8% the accumulation could be somewhere around 7 to 8L where as the withdrawn amount of Rs 200000 from PPF would have grown to only 3L.