Credit cards offer many benefits but are a lot of trouble too if you use them unwisely. Some gyan for happy swiping.

Rajalakshmi Sivam

Running up credit card bills that are way out of your budget? Losing track of due dates? Then it’s time to learn about credit cards.

There is more to credit cards than getting one and swiping it whenever you are short of cash! Understanding the billing cycle, bill due dates, interest calculations and terms and conditions are all a must before you go for a credit card. Here is some gyan on how to use these cards wisely.

Nuances of Interest calculation

Credit cards were initially introduced with the intention of simplifying matters for individuals who run short of cash. A credit card essentially offers a loan for an interest for a limited period. Purchases routed through a credit card usually enjoy an interest-free period of 20-50 days depending on the type of card and the day of purchase. On failure to make the payment on the due date, the cardholder would be charged interest on the bill amount calculated from the date of the transaction (not the due date, mind you). The interest rate usually charged on credit cards is 3 per cent per month.

Here is an example to help you understand the process better: You made a purchase for Rs 20,000 on March 1. Your credit card billing cycle is February 16-March 15 and the billing date is March 15. The due date is April 7 and you settled dues on April 12. Your credit card company charges an interest rate of 3 per cent with the minimum dues being at 5 per cent of the outstanding. Here are two possible scenarios:

Scenario 1: On default

Interest charged on April 12 = 20000 * 43days (March 1-April 12)* (0.03*12/365) = Rs 848.22

The twist that is unexpected is the period considered for interest calculation. When the holder defaults, he is charged interest for the due amount of the bill from the date of transaction and not from the due date, which we normally assume. Though you think you had delayed payment by only six days, you would end up paying interest for 43 days, calculated from the day you actually made the purchase. Further, the card company would have added your card number to the defaulters’ list — a black mark on your credit history.

To avoid this, you could pay the minimum amount due on the bill on/before the due date, which is normally 5 per cent of the total outstanding. In such a case, your interest would be calculated as follows:

Scenario 2: Payment of the Minimum amount due

Interest = 20000* 38 days (March 1-April 7)* (0.03*12/365) = Rs 749.59

+

Interest on balance due = 19000* 5 days (April 7-April 12)* (0.03*12/365) = Rs 93.70

Total Interest charged on April 15 = Rs 843.29

However the smart thing to do is to time your purchase at the beginning of the billing cycle, enjoy the maximum credit period, and pay the entire bill on date. This will let you enjoy an interest free credit for nearly 50 days.

Borrowings/Cash withdrawals

Never use your credit cards to meet expenses of a long-term nature — such as borrowing for buying a vehicle or automobile or to meet other big financial commitments. The interest cost of a loan borrowed on credit card would be nearly 25 per cent higher than on a personal loan. Besides, there would also be additional charges such as transaction charges on ATM withdrawal of cash and if you decide to prepay the loan, you may pay up an additional penalty as well. So, you can rather consider a personal loan, which would charge you an interest of about 12-15 per cent annually, or even a loan against your bank FD.

Subscription to services

There have been cases where credit card users have been sent unsolicited insurance policies/credit cards and also charged for premium on those policies. The Insurance Regulatory Development Authority’s (IRDA) stance on this is that on failing to return such policies within 15 days you will automatically become a party to that insurance contract. So the first thing you should do on receiving an unsolicited card bundled with insurance is to return it immediately through registered post and lodge a complaint.

In case of other card-related problems too, first file a complaint. Go to the bank personally, then give the complaint in writing and get an acknowledgement for it.

On registering it with the call centre, note down the complaint number and name of the person with whom you registered it. As the next step, you could also take it to the grievance redressal officer of the bank whose e-mail ID would be available on the bank/NBFC’s Web site.

Legally, the banker would be made to reverse any premium taken on unsolicited policy and also pay penalty to the recipient.

How many is too many?

The mad rush amongst private banking players has led to promotion of credit cards on a big scale. With so many promotional offers — gift hampers, foreign trips, travel bags — some people subscribe to as many as five-six cards. Remember!

The credit you use has to be repaid. Too many cards just drive you to impulsive purchases that could be difficult to keep track of. Subscribe to just one card or two cards ideally. Understand your credit card’s features, plan your purchases at the beginning of the billing cycle, keep track of your due dates and make prompt payments. This will keep you healthy financially.

Credit card cancellation

Surrendering a card is not as easy as subscribing to one. But be patient. First, clear the balance outstanding in the account.

Then address a letter to the bank conveying that you wish to surrender it. After receiving the correspondence, cut the card into pieces and send it to your card issuer.

The other side

Thinking of chucking your card? Wait! If you learn to use your card smartly, then the credit card is a boon. With the ease of carrying a card instead of bundles of cash, you also get interest-free money for a certain period, you can issue a cheque against your card limit, you may also get discounts and free add-ons.

Credit card companies also offer reward programmes. Each time a cardholder uses his credit card, he earns a certain number of points.

After accumulating a minimum number of reward points, the customer can redeem them at participating merchant establishments for a variety of gifts.

So, the last word is — use your card effectively. A little caution and thoughtfulness can save you from a multitude of problems. Happy swiping!

(This article was published in the Business Line print edition dated March 30, 2008)
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