Points to be considered before using Credit Cards

In this era of Plastic money, all of us use credit cards, probably from more than one bank. This blog is intended to draw your attention on following charges levied on credit card holders:

1)   Interest is charged on the outstanding balance on a credit card if only the minimum or partial amount (more than minimum amount due) is paid by the payment due date, not the full amount that is due. This is called the 'revolving credit facility'.

Example:

Opening Balance: 0

Purchase Transaction: INR 10,000 made on 25 July

Statement Date: 31 July,

Closing Balance: INR 10,000,

Payment Due Date: 18 August,

Payment made: INR 8,000 made on 18 August

Current Statement Date: 1 September

In this case, interest will be charged for INR 10,000 from 25 July to 17 August and the unpaid balance of INR 2,000 will attract interest from 18 August to 1 September.

2)  There is an interest-free period (Grace Period), during which the amount used on a credit card does not attract any interest. This is the duration between the first day of the billing cycle and the payment due date.

Example: Assume that your Statement Date is 2 Nov (covering transactions billed between 3 Oct and 2 Nov) and your Payment Due Date is 24 Nov. You have paid the total amount due by 24 Nov (making you eligible for interest-free period). In this case, the Payment Due Date is 22 days after the Statement Date and the interest-free period will range from 22-52 days.

• For a transaction billed on 3 Oct, the interest-free period is 52 days (from 3 Oct to 24 Nov)

• For a transaction billed on 2 Nov, the interest-free period is 22 days (from 2 Nov to 24 Nov)

3)  If a credit card is on revolving credit, all new purchases on the card will also attract the interest rate from the transaction date till such time that the dues are cleared. There is no interest-free period till all the dues are paid.

Example:

Taking forward example in point (1)

Purchase Transaction: INR 3,000 made on 15 August.

Interest will also be charged for INR 3,000 from 15 August to 1 September.

4)  The interest rate is typically disclosed by the credit card companies as a monthly percentage. The interest payable depends on the rate, outstanding amount and the number of days for which the amount due remains unpaid.

5)   A late payment charge is levied if the due amount is not paid by the specified date.

6)   Over limit fees is levied if total outstanding at any point of time exceeds the credit limit sanctioned on the credit card.

Service tax is applicable on interest and other fees and is included to ascertain the total amount that is due

Consequences of non-payment of credit card dues:

When you stop paying your credit card bills, your minimum payment will grow and your interest rate will increase. Each month your minimum payment will get larger as more late payment fees are added to your balance.

After 60 days of nonpayment, your credit card issuer is allowed to increase your Annualized Percentage Rate (“APR”) to the default or penalty rate, which is the highest rate on your credit card balance. When the default rate kicks in, your finance charges will also grow. The result is that your outstanding balance and the payment you need to catch up gets larger every month you're late.

Credit card issuer bank will start calling you a few days after your first missed payment sometimes several times a day. Eventually your debt will be sold to a collection agency. These collection agencies can be a pain to deal with -- they're sometimes abusive and threaten legal action. Their constant phone calls and letters can be annoying and embarrassing, especially if they contact family and your workplace to find you.

 
Late payments are added to your credit report as you're 30, 60, 90, 120, and 180 days late. Unfortunately, these late payment notices will make your credit score decrease and could ruin your ability to get a credit card, loan in future.