LoanRaja Blog- Personal Finance Guide

Credit cards are one of the few products which have dedicated users and aggressive critics. While those who use it efficiently swear by its comfort, those who have been put to discomfort, don’t miss an opportunity to blame the plastic money for their financial problems. Are credit cards then a product which can land you in a mess eventually? The answer, obviously is NO provided you understand its nitty- gritty. In fact, just understand the fine print associated with your credit card and chances are that you will have lesser opportunity to make it a scapegoat for your financial troubles.

There are two important dates for every credit card user as the product’s entire dynamics revolves around these two dates. One is the statement date and the other is the payment date. As a card user, if you manage to remember the statement date, it will do a lot of good as you can effectively use your credit card. As the name states, this is the date on which the card company generates a statement of all your transactions. Hence, the credit card bill amount will be the sum of all transactions made from previous statement date to the latest statement date. Now, why should you remember the statement date?

Let us assume that the statement date of your credit card is 10th of every month and payment date is 30th of the same month. If you make a purchase on your credit card on 9th or 10th, chances are that you will be required to make the payment during the same month (as per payment date). That would mean you can enjoy a free credit period of only a maximum of 20 days. Instead, if you had made the purchase on 11th of the month, your purchase transaction would be after the statement date of the same month and hence would get reflected in the statement of the following month. Since the payment date is on 30th, you would effectively enjoy a free credit period of 50 days! Now, such smart shopping can be done at least for big ticket purchases though you can’t really plan your restaurant or movie ticket bills. However, a good memory of statement date surely will come in handy as you can make a better use of your card.

Even if you are unable to remember the remember statement date, make sure to remember the payment date as missing this date with respect to this date can land you in trouble. Credit card companies are pretty severe on defaults and can slap you with hefty charges. As you would have noticed, the interest rate on credit card outstanding amount is pretty high and in recent times, has gone up to as high as 50%. In addition, card companies also charge late payment fees if the statement amount is not paid on time. For those who struggle to remember the due (payment) date, ECS (electronic clearing service) is the best option. Generally, credit card companies will debit the bank account on the payment date. If the account does not have the required amount, the minimum balance would be debited from the savings account.

And finally, make it a habit to keep your credit card spends according to your ability to repay. Sure, credit card allows you the flexibility of paying only 5% of the statement amount but the flexibility has a huge price as the card company will slap an interest on the entire amount even if you pay only a portion. This interest would be as high as over 4%on a monthly basis and if you take into account other charges, the final penalty will be over 50% per annum. All this of course, can be avoided if you get into the habit of clearing the entire statement amount by the payment date. That will also help you realise that credit card is a product which allows you to enjoy free credit for a certain period.

Earlier a status symbol and now an integral possession of every wage earner and self-employed person in urban areas, the ubiquitous credit card is a pointer to the rising consumer spending in India. Aggressive campaigns by banks and NBFCs over the years to cash in on the burgeoning middle class consumers’ itch for ‘buy now pay later’ led to a phenomenal rise in the penetration of the plastic money. Foremost advantage of a credit card is its mobility. For shoppers and travellers, choice of a credit card is a matter of convenience. The cards have increased the purchasing power of the individuals and the younger generation is on a shopping spree.

Basically credit card operations rely on four players. Visa, Master, Diners, American Express and JCB are the providers. The second group comprises of vendors or the respective banks and financial institutions, which issue cards on behalf of the providers, like ICICI, HSBC, Citi bank, SBI, HDFC, Standard Chartered etc. Then come the cardholders. Lastly there are shop owners or any other establishments that accept the cards from the holders and honour the purchases made by them or the service rendered to them. Many cards have special features like accident insurance cover to make it attractive. Good customers get rewards too.

Strict terms

It is easy to get a credit card if you can provide the bank /NBFC proof of identity, address and income. Before taking the plunge compare the terms offered by different banks and make a wise choice. Watch out for any hidden charges. Ignorance of some of the charges levied can prove costly later. Terms, which used to be stringent, have been liberalized. Along with attractive offers to lure customers towards their credit card banks also set some strict conditions for non-repayment, penal interest and late payment charges. All bank websites display the dos and don’ts of credit card use. These are also given on the reverse side of statements. Besides customers get email alerts also.

A credit card customer normally enjoys a free credit of 50 days and the shopkeeper gets his payment from his banker as soon as he presents the statement of the purchases made. The bank then sends the vouchers to their respective head offices or clearing offices where the money is collected from banks that have issued the cards. The whole operation takes about three weeks whereas the credit enjoyed by the customer is much more than that. Credit-free period is the time given by a bank to a customer to make payments on credit card purchases without having to pay any interest. If wisely used, credit card can be a source of interest-free working capital for a self-employed person.

Cash withdrawals

If you have an urgent need for cash you can swipe the card to draw cash. You have to consider this as the last resort since this facility is accompanied by some harsh terms. Every time you draw cash you have to pay a minimum service charge of Rs.500. The interest also is higher. Repayment of cash withdrawal also is a complicated process and you can fall into a debt trap. Credit card is short-term credit, which is costlier than a personal loan. Banks charge high interest rates of over 36% per annum on credit card debt, as it is unsecured. Delinquency rates are high. In default cases there is a high degree of write-offs.

Before selecting a credit card the customer must be clear about all fees a bank is charging. Compare the rates of different banks first. Credit cards have different types of fees like joining fee, annual fee, renewal fee, add on fee, card replace fee etc. Prompt payments can avert problems. If you pay only the minimum balance you may have to pay interest on next month’s bill also. RBI has clear guidelines to make credit card operations transparent. The terms and conditions on credit card must be clearly conveyed to the customer and banks are barred from collecting any fee other than what was mentioned at the time of issue of the card. There are ample avenues for grievance redressal.