Delaying credit card payments? Think again

Besides the credit facility for purchases,a credit card also offers cash withdrawal facility. However,it is advisable not to draw cash using your credit card. While interest rates for purchases on cards apply are between 2.7 and 2.85 per cent per month,cash withdrawals attract interest on daily basis. The credit card company starts charging you the moment you withdraw cash from the credit card. On top of this,there is also a withdrawal fee of about 3-3.5 per cent of the amount withdrawn. On the other hand,purchases made on a credit card get an interest-free period of 25 to 40 days.

Now,while we are on the subject of interest rates levied by credit cards,let8217;s discuss a related issue. Have you ever wondered if there is an upper limit to the interest rates charged by credit cards? Well,the Reserve Bank of India RBI has been stressing repeatedly on transparency in such issues as the banking ombudsman receive a very high percentage of complaints,especially on credit card interest rates. In a recent circular sent to the banks,RBI has requested banks to fix an upper limit on the interest rates,processing fee and other charges for loans and as well as credit card dues. Taking into account that interest rates will vary depending on the repayment track record and default history of the credit card holder,the RBI has requested that banks should publish this upper limit on interest rate for different categories of people on its website.

RBI believes that if banks adhere to these guidelines then the average credit card customer will be more aware of the implications of the interest he needs to pay,especially if he is in the habit of only paying a part of the outstanding amount due. In a circular issued in July,RBI has also warned that it reserves the right to impose penalty on a bank or NBFC under the provisions of the Banking Regulation Act,1949,the Reserve Bank of India Act,1934,for violation of any of these guidelines issued in its recent circular with respect to credit cards.

Therefore,do not delay repayments on your credit card. Also remember that if you neglect payments,you will be labeled a defaulter and consequently will be shelling out payments at a higher interest rate compared to a credit card holder who is regular in repaying his dues.

Minimum payment catch

It is important to repay more than your minimum payment due on time,which can be anywhere between 2 per cent and 5 per cent of the outstanding amount due,depending on your bank. Let us take consider an example Priya Sharma. Priya,a compulsive shopaholic, uses her credit card extensively. Most of the time,she uses more than 80 per cent of her credit limit,which is Rs 1.5 lakh. She had the habit of paying up only the minimum amount due promptly before the due date. Once her expenses on the card amounted to Rs 1 lakh. Look at the chart The Black Hole to see how much interest she had to eventually shell out by the time she repaid the amount due in full by paying only the minimum amount due. Remember,this is calculated without taking into account her future expenses on the card,assuming she does not use it after this particular billing cycle.

Also look at Where is the mole?. The blue portion of the pie indicates the actual credit utilised and the red portion of the pie indicates the interest accumulated on it before it was repaid in full. In this case,the interest to be repaid is around 150 per cent of the actual credit borrowed. This was because Priya kept repaying only the minimum amount due for the entire repayment period.

Now that the importance of paying much more than your minimum payment due before the due date has been stressed,you now need to figure out how to secure the habit in place. The key is to keep a close tab on your expenses.

Some basic rules to remember are not to overspend,not to carry a balance forward to the next billing cycle and to always pay bills on time. This will have a positive effect on your credit score as it certifies your disciplined approach to handling credit.

Here are some pointers to keep a close tab on your credit card usage.

Concentrate on long term requirements rather than give in to short term whims.

Remember credit cards are intended for emergencies and not as a means to spend more money!

Do a close study of terms and conditions. i.e. Read the credit card statement thoroughly and carefully everytime you get your monthly credit card statement. New rules are often announced in this statement and might escape your notice if you are not diligent.

Never default on payment

Repay the full amount due,if you cannot,try to pay as much as possible beyond the minimum payment due

Be aware of your credit limit

Understand how charges are applied

Mark your own limit that does not exceed 30 of the limit set by the credit card company

Closely monitor transactions

Enjoy spending on your credit card within reasonable limits and never delay repayment of your dues.

The author is head content and research at the BankBazaar.com.