Having a credit card is a must today. Most of our payments happen digitally. One needs to have a credit card to transact online and make the most of e-commerce deals. Moreover, a credit card is also your backup in a cash crunch. Modern day credit cards come with various sops such as life insurance, accidental cover, accumulation of air miles over spends , airport lounge access, and cash back options on spends or rail reservations etc. However, what is generally ignored is the fact that credit cards aren't free. They do have charges - some well-known, others not no well-known. The little-known charges need to be understood to avoid penalties, heavy interest rates, and excess payment charges later on.
Here is a lowdown on five lesser known credit card charges.
The credit card comes with the advantage of cash withdrawals from ATMs. But this service is not free and a transaction charge around 2.5% of the cash advance is applicable. An interest on the cash from the date of withdrawal will be levied ranging from 24% to 46% per year. This must always be used as the last resort. Also, cash withdrawals are attract interest immediately unlike other credit card transactions for which there is an interest-free period of 40-50 days.
Annual Maintenance Charge
When you buy a credit card, always be clear about the annual charges. Sometimes, these may be waived off fully or for a limited period. Usually, a free credit card is offered without this charge. For some cards, the charge may be applied from the second year. Always be aware of these charges, and whether they've been waived off for you.
A credit card bill displays the total amount that is due, and the minimum payable amount - typically 5% of the total dues. A lack of understanding of both these charges has the potential to land you in a debt trap. Many people often pay only the minimum payable amount and leave the rest pending. It is important to note that a 2% to 4% interest rate is applied per month on the remaining amount, and the monthly rate of interest is annualised to arrive at an APR or annualised percentage rate of 36% to 38%, which is extremely high for any loan. This annualised percentage rate combined with nominal rate of interest can result in a huge financial burden. Therefore, always pay your credit card bill in full and on time every month. If you're unable to do so, pay off the debt in the shortest period possible to avoid heavy interest charges.
Late Payment Charges
You will be penalized for a late credit card payment. This comes into force when the customer defaults over the monthly credit card due payments after the due date. A flat late payment charge is levied and is not dependent on the interest charges.
Before GST, the Service Tax levied on credit card-related services was 15 per cent. After GST, this increased by 3 per cent and the credit card companies now charge 18 per cent. You should be aware that after GST, interest or late payment charged would be taxed at a higher rate.
Although, credit cards empower us to meet our urgent money needs, it is important to understand all the charges before we procure and start using one.
The writer is CEO, BankBazaar.com