Plastic money may not be as popular as it is in the US or Europe but we still have around 18 million credit card users in India,a sizeable number by any measure. The use and preference for cashless transactions has also spread beyond the metros to tier-II and tier-III cities. But,despite all this,credit cards continue to be a push-product and not a demand-based product.
Small to large shops in tier-II cities do not hesitate when asking you to pay additional 2-3 per cent charge for credit card payment. If you are a salaried person with a private bank account,you might be receiving at least one call a week offering you a credit card with hordes of benefits. The offers seem worthwhile. But what you are not told is the basics of managing a credit card.
Free Credit Days
All credit cards promise a certain number of days for which you are offered interest-free credit,subject to your credit limit. You are told that you will get 45 days or 50 days to make your payment after purchase. You mark your calendar to make your payment after 45 days and only after a week comes a shocker your credit card bill with interest charges at 36 per cent p.a. This the most common surprise one gets after using a credit card.
If you read the fine print of your credit card conditions,you will realise that the free credit starts from the first day of your billing cycle to the date mentioned as last date to make your payment for the current months bill. So if your billing cycle is 1st to 1st of every month and your credit card allows you 15 days from the statement day to make your payment,you get 45 days of interest free credit provided you make your purchase on 1st day of the month. So,if you make your purchase on January 30 and your statement is drawn on January 31,the last day to make your payment would be February 15 and thus you will get only 16 days of interest-free credit. If you miss this deadline to make full payment,and make a partial payment,you will be charged at 30-50 per cent p.a. for the full statement amount; irrespective of what amount you have paid.
Credit cards are commonly have the facility to postpone the liability of making the full payment by just paying 5 per cent of the total bill amount. You will be charged interest at 3-4 per cent on the months dues and you can always settle the bill in full next month.
From experience,doing this gets you fixed into a vicious cycle of high interest. Consider this: If you have spent Rs 10,000 on your credit card and you pay only the minimum amount every month,which is usually 5 per cent of the total outstanding,with no incremental purchases,it would take you 416 months to pay off your debt and you would have paid an interest of Rs 13,515 in the process taking your total payment to Rs 23,515 for a purchase of just Rs 10,000.
In case you have dropped your credit card or it has been stolen,you need to report the loss as soon as possible. If you report late and in the meanwhile someone makes a purchase on it,you are liable to make the payment for the same. To protect credit card holders from this,most credit card issuers offer insurance for such stolen cards but these too come at steep prices and do not offer much value.
Every credit rolled over,every late payment,every charge on your card is minutely noted and affects your credit history. So if theres a disputed charge on your card,and you dont pay for it,it affects your CIBIL report and would badly affect your future applications for loans or cards.
Credit Card Fraud
If you have a card with very high credit limit,you should be very vigilant while you give your card to make payments at hotels,restaurants,shopping malls,etc. There are a number of cases where the cards magnetic strip and data is copied and later used to make fraudulent purchases on your card. Frauds are nowadays no longer restricted to just swipes. There a numerous cases where people are duped online by fishing or hacking.
Even if you are making an online payment you need to be very vigilant and if possible even positively skeptical about the security of the webpage you are transacting on. Make sure it is a https website and verify the security certificates before transacting. Make sure no one is watching you while you are typing your credit card password or CVV number.
The author is Senior Vice-President,Bonanza Portfolio Limited