If you can't use it wisely... don't use it at all-09/08/2010

09/08/2010

If you can't use it wisely... don't use it at all

It's almost become a fashion. Go to the nearest mall, choose something and pay through the credit card. Whether one calls such people shopaholics or needing ‘retail therapy’, the other side of the story is scarier: Credit card bills.



Let's understand how swiping casually can impact you. Say, you buy clothes worth Rs 1,500 from a shop on August, 2. Now, your bank pays the shop when you swipe the credit card. Basically, the bank has given you a loan of Rs 1,500 from the time it pays the merchant.

The statement, however, comes only by the end of third week or early fourth week. Then, there are another two weeks given to you to make the make the payment. So, the free credit period for a transaction made on August 2, is till September, 10.

Once the due date (September 10) has passed, you will be charged interest on the unpaid amount - ever wondered why banks like you when you only make the minimum payment? So, if you paid up only Rs 500, the bank charges interest from September, 10 onwards. Here are some interesting facts:

Any further transactions will, usually, start attracting interest cost from the purchase date itself. This is because there is still an unpaid balance. So, if you now spend Rs 2,000 at a restaurant, it will immediately start incurring interest charge - you do not get free credit. Your free credit period does not get reinstated till such time as you repay your entire bill in full. Banks usually charge about 3 per cent monthly.



Interest on a daily basis: Sure, you're paying interest. But it is getting compounded on a daily basis.

Late payment: It can be 30 per cent of the minimum amount or a flat fee. But, if your payment has got delayed by just a few days due to some genuine reason and you call up your bank, they could be willing to reverse this charge, especially if you have a good history of regular payments.

Credit limit: If the amount spent on your card exceeds the credit limit, then a fee will be charged - Rs 200-Rs 500. While ideally, the bank should not give you more credit than the limit, but many times, they continue to do so. For a fee, of course.

Suppose your credit limit is Rs 50,000. You have spent Rs. 49,750 so far, and receive your statement. You pay, but two days after the payment due date. So a Late Payment Charge of Rs 500 is applied - you now owe (49,750+500) =Rs 50,250.



You are now over limit, and so an over limit fee of Rs 250 can also be applied, making the owed balance 50,500. Even if you pay the entire Rs 49,750, the Rs 750 worth of charges will start attracting interest from the payment due date.

Balance transfer: Balance transfers sound good. But a little more probing will tell you the other side of the story. Say, you have two credit cards - a Citibank card, with an outstanding balance of Rs 20,000 and an ICICI Bank card with a credit limit of Rs 25,000. Thankfully, there is on outstanding on the latter. If you want to shift your outstanding on the Citibank card to ICICI Bank, here are a few things you should know.



One, banks usually do not transfer balances which are overdue. That is, if there are no payments made on the due date, banks will not transfer that balance. Two, there is usually a balance transfer fee. Typically about 2 per cent of the amount transferred. On an outstanding balance of Rs 20,000, this translates into Rs 400.

Three, here's the googly - as the balance amount is outstanding on the ICICI Bank credit card, all other balances and fresh transactions will start attracting interest from the transaction date. That means, if there is a transaction on the card in which the balance has been transferred, there is an interest charged on the entire balance from the date of transaction. Yes, the idea was to scare you about credit cards. If you can't use them wisely, don't use them at all.

Source:Business Standard