Almost every person with a debit card also owns a credit card. And though credit cards are a popular method of payment, especially during the Coronavirus pandemic, most users remain unaware of what they end up paying for revolving credit. While banks may claim a credit card to be free but, actually, there is no free lunch. It is therefore important to know some of the important terms and conditions attached.
Here are some of the commonly levied charges and mistakes that credit card users typically make.
1. Maintenance Charges: A number of banks offer free credit cards. This usually means the initial joining fee and annual charges are waived off for the first year. Post that, the annual maintenance fee kicks in. So it is important to check if the card is free for just the first year or for its entire lifetime.
2. Foreign Transactions: While most leading credit card providers have globally accepted cards, foreign transactions involve additional fees. A percentage of the amount transacted or converted into rupee will be levied as the fee and most users don’t know about it.
3. Surcharges: If you purchase petrol using your credit card, a certain percentage of the transaction value is levied as a charge. It is either 2.5 percent of the transaction amount or a flat fee of Rs10 to 25 (whichever is higher) depending upon the bank.
4. Using credit cards for cash withdrawals: Credit card issuers levy finance charges on all ATM cash withdrawals made through their cards and a cash advance fee of up to 3.5 percent of the cash withdrawn. The finance charges would be levied till all the cash withdrawals are repaid. Making ATM withdrawals through credit cards would also lead to revocation of the interest free period on fresh credit card transactions till the cash withdrawals are repaid.
And also refrain from making any fresh transactions through that credit card until then.
5. Availing revolving credit facility instead of EMI conversions: Availing revolving credit on credit cards would attract steep finance charges of 30 to 49 percent per annum on the unpaid bill. It will also lead to the revocation of interest free period on fresh credit card transactions till the repayment of the previous unpaid credit card bills. If card holders continue doing this for several months, the steep interest rate on the revolving credit can easily lead him or her into a credit card debt trap.
Such EMI conversions come with a much lower interest cost and have tenures ranging between 6 and 60 months. The availability of lower interest rates and wide range of tenures would allow the credit card holders to repay their dues in smaller tranches every month as per their repayment capacity.
6. Duplicate statement fee: While the monthly statements are delivered free of cost to your postal address, if you request for a duplicate statement fee, your card issuer will levy a duplicate statement fee which may range between Rs 50-100.
7. Cheque bounce or dishonour of ECS charge: If the payment on your credit card bounces, your bank will charge you a fixed rate which can be in the range of Rs300 to Rs350. If the bank sends a representative to pick up the cheque or cash on the overdue account, an additional fee of Rs 100 is added to your next month’s statement.
8. Late Payment Charges: Banks charge a flat fee in the range of Rs100 to Rs750 when credit cardholders fail to pay the minimum due amount in time. These late payments have a direct impact on the credit score. Additionally, only the payment of minimum due is not a solution. Interest rate on credit card debt is multiple that of the interest rate on personal loans or banks loans for purchasing high value consumer durable such as television, air conditioners or furniture.
As you can see, the credit card offers a great convenience for someone who wants to lead a fast life and hassle free shopping and spending experience. The convenience however comes with a cost and a large potential finance charge. A wrong step or even negligence with the card usage and payment can land you in a card debt trap that can ruin your finances.
So make sure to go through your cards “Most Important Terms and Conditions (MITC)” before you start using the card to make payments. Prudent use of your credit card will also help you keep your credit score intact and keep your overall financial health in order.
(Zaki Sayed is a Mumbai-based independent journalist. He writes about business, finance and data analytics.)
(This article is in arrangement with Moneymonc.com)