As we know a credit card is used by the cardholder to pay for something or to withdraw cash on credit. Having a credit card doesn’t mean that one can take unlimited amount. The lender puts a limit on how much you may spend on the card The limit is called credit limit.One needs to remember that one needs to pay back. Each month, credit card issuer sends a bill of statement, which has following details. Image below shows the statement .
Rewards point summary: This is the record of the rewards points you have earned/redeemed till date. The summary usually gives an account of your opening balance and the points or credits earned or redeemed. You should not confuse reward points with credit limit or balance outstanding. Reward points and the method of redemption vary from one credit card to another.
Transaction details: The transaction details will have the date of transaction, place of transaction (where you spent the money) and the transaction amount. This helps you verify the charges credited to your card.
It is important that you check your credit card transaction details regularly. This is the only way you will come to know if some transaction has been fraudulently credited to your card.
Paying Credit Card Bill
The cardholder is required to pay back the amount that has been borrowed in accordance with the terms and conditions of the credit card agreement. With most types of credit card you can settle the amount owing in full and without interest (on purchases) within a given period of time, called as the grace period . Mostly companies give 20 to 25 days to make their bill payments. One can also pay off a portion of the outstanding amount and carry the remaining balance forward. Infact one can pay minimum amount due(set by the card issuer) and can continue using the card. Sounds too good to be true!! The catch is that if one does not settle the credit card dues fully, one needs to pay extra, the Interest .
Remember about the interest we talked about, how one earns interest by putting money in the bank or borrower has to pay interest on taking loan. Interest-free period for purchases is in effect only if one had paid all the dues.
If you don’t pay credit card Bill in full
Card issuers give you the option of paying a minimum amount by the due date, which is usually 2.5-20% of the total amount due, along with applicable card fees, overdue minimum payment, and any instalments. Any amount paid that’s less than the total amount will have interest charged on it. Any amount paid less than minimum payment due as on payment due date will also attract late payment charges.
Lets take an example of how much one needs to pay more if one does not pay back all the dues on the credit card. Mr Sharma bought grocery for Rs 100 using a credit card. Let’s say he didn’t pay the entire 100 Rs when the bill comes, so he needs to pay interest. Let’s say credit card issuer charges 1.25% per month. Now if Mr Kumar pays only Rs 20 per month and he doesn’t use credit card for anything else then let’s see how much time and how much extra he needs to pay. Mr Sharma will have to pay Rs 3.93 in six months
As you can see, he will repay Rs 100 in 6 months but he has to repay Rs 3.93 as interest. Rs 3.93 does not seem a big amount but if the amount due is bigger then interest part is also big. If Mr Sharma only paid Rs 10 every month then it will take 11 months to be pay the debt. In that time-period, Rs 7.51 will be paid in interest. For example if the credit is taken for Rs 1000 and only Rs 40 is paid every month then it would take 31 months (almost 2 and half years). Interest of Rs 207 needs to be paid. On the American Express Platinum travel credit card with an interest rate of 3.1% per month, on a transaction of Rs.5,000 if the minimum payment due is paid every month (subject to a minimum payment of Rs.100 every month), it will take up to 75 months for entire outstanding amount to be paid—which will balloon to around Rs.10,000. Calculators Calculator ,Calculator1 can be used to find how much time it would take to repay the credit card debt
Different credit card offers different interest rates so one should try to get the credit card with low rate. If one buys the cycle for Rs 2000 and pay Rs 500 every month then the different amounts one has to pay at interest rate of 8% and 18% is given below
|INTEREST RATE||TIME||TOTAL INTEREST(RS)||TOTAL PRICE(RS)|
How much time it takes to pay the credit card debt
If you only pay the minimum amount on your credit cards (about 2 percent of the outstanding balance or 10, whichever is higher), you’ll be paying a long time. Also, you’ll end up paying more because of accumulating interest charges. The table below demonstrates how much faster you can pay off your credit card debt when you increase your minimum payment to 10 percent of the monthly balance. Also, if you make more than the minimum payment, you not only pay off your credit card sooner, but you save money in interest charges.
|Years to Pay Off Credit Card Debt|
1 10 minimum payment in effect if 2% of balance drops below $10. A 1 minimum finance charge in effect if finance charge calculates below 1.
* Not in this lifetime! At these rates, payment exceeds 50 years and in many cases, interest eventually becomes greater than the minimum payment.
Picture (Infographic) below shows how much time it takes to pay the credit card debt
Credit card and it’s problems
Don’t buy what you can’t afford
Credit cards are not a source of free money. In fact, using a credit card is like taking a loan. A simple way to avoid card misuse is to charge only those purchases to the card which you know you will be able afford even at the end of the month. A Rs.20,000-mobile phone may look affordable in the first week of a month, but too expensive in the last week.
Understand the card
Credit cards come with a range of interest rates, fees, and reward programmes. Look for one that best suits your circumstances. If you go to a bank’s or a card provider’s website, you will see that the cards are segregated into various sections; mainly travel, shopping, fuel, cash back, premium or luxury. Some of the important details to take note of are: rate of interest, grace period, membership fees, and renewal or annual fees. Use the comparison tool.
Remember the due date
This is a real killer because interest rates on credit cards can be quite high: from 1.99% a month (that’s 23.88% annually) to 3.5% a month (that’s 42% a year) depending on the type of card. What’s more, the interest is charged on the entire outstanding amount; and it’s applied from the date of purchase, and not from the beginning of the month. The formula used to calculate daily interest is: [(outstanding amount x interest rate per month x 12)/365].
Let’s take the Rs.20,000 phone as example. Say, the interest rate is 3.1% per month, purchase date is 20 April, and statement date is 1 May (difference of 12 days). Now, if you miss the due date, the amount of interest you will be charged is: [(20,000 x 3.1% x 12)/365] x 12 = Rs.244.60
On top of this, there will be a late payment or a delinquency fees. For example, HDFC Bank Ltd, charges a flat fee depending the statement balance due—it’s Rs.700 if the bill is above Rs.20,000.
Late payment and even withdrawing cash using your card will mean losing out on the grace period or interest-free period, which usually varies between 20 and 60 days