Credit Card Concepts
If you have a credit card then there are some concepts and terms related to using these cards that you must familiarize yourself if. Better knowledge of these will have you save money, especially if you are a regular user of your credit card.
1. Annual fee: Did you know that some types of cards might charge you an annual fee just to keep your card active? This is especially the case in you have some card that offers users special benefits and privileges, or a very friendly loyalty and rewards programme.
If you are not an active user of credit cards, then the most basic or regular card will do for you. These entry levels cards do not charge any fee. In fact, given the competition in the Indian market, most of the basic cards don’t charge annual fees. Nevertheless, some cards are marketed in a very savvy manner, such that they tempt with you some catchy benefits, and you get entrapped into paying an annual fee just to avail of those benefits.
• Credit limit: When a card is issued to you, the issuer decides a maximum limit up to which it is contractually agreeable to offer your credit. Over time, as you develop trust with the issuer and show a clean repayment history on your card, you might become eligible for an increased credit limit.
If you are spending in excess of your credit limit, the transaction might get rejected, causing you inconvenience. If the transaction does go through, you might be charged a penalty.
The credit limit is influenced by your income, repayment capacity and by your age as well. For instance, Shyam who is 23 years old just started working recently, and was approved for a monthly credit limit of Rs 10,000. If he was still in college and had no income, it’s likely that he might not have even been eligible for a credit card. On the other hand, Shyam’s 51 year-old father who is a senior manager at a MNC also applied for a card from the same issuer but was sanctioned a limit of Rs 1 lakh. The issuer is unsure of Shyam’s repayment capacity for a higher amount of credit, so has capped his limit at Rs 10,000. Over time, as Shyam’s career progresses and his income rises, and as long as Shyam is disciplined about paying his dues on time and in full, then he can expect that his limit will also be increased.
• Cash advance: Just like debit cards, you can use your credit card to withdraw cash from a bank or an ATM. This is possible as long as you are still within your authorised credit limit, but lenders will set a cash advance limit that can vary depending upon the customer’s income profile. When you withdraw cash from a debit card, it comes from your own cash or savings account, and you are not charged a fee. But, when you withdraw using a credit card you are effectively taking a loan from the bank. As a result, the charges on withdrawing cash using credit cards are very high.
You will be charged an interest on the cash amount that you withdraw using your credit card. This will start accumulating from the day of withdrawal itself till the day you pay back the amount in full. You might also be levied a transaction fee. Use the cash withdrawal facility on your credit card only if you have no other option of getting cash.
• Repayment period: When you spend on your credit card, you get a time period within which you are expected to repay this credit to the card issuer. Typically, this could be 3-4 weeks from the date of the card statement. So, for all practical purposes, you are getting an interest free loan from the issuer from the date you spend on your card, up to the date you are expected to pay your dues.
• Annual percentage rate (APR): If you are not able to pay off your credit card amount within the repayment date, you are levied an interest cost. APR is the rate at which you would be charged interest for any outstanding balance that is overdue after your due date.
At the time of signing the credit card contract agreement with your card issuer, the issuer will inform you about the rate. However, the issuer can unilaterally change the rate at a later date, but only after informing you about the rate change. Typical monthly rates of interest charged on outstanding balances are 3% – 5%. As a result, the APR works out to be higher than 36% (12 months x 3% interest = 36%).
The longer that you have an outstanding balance, the higher the actual interest that you will end up paying. So don’t just pay the minimum balance, but pay off your dues on time and in full.
• Minimum due: Your monthly credit card statement will highlight the total amount that is due, the due date and the minimum balance that you are expected to by the due date. If you have the money to repay in full, you must do so. If you pay only the minimum balance, you will be charged interest on the pending balance. And, if you don’t pay either then you will be charged some penalties as well. Even if your total balance is say Rs 5,000 but you fail to pay the minimum, the cumulative penalties and interest charge for late payment can be up to Rs 1,000 and can rise every month that you are delayed in paying the amount back in full. If you don’t pay off the original Rs 5,000 outstanding and then this additional Rs 1,000, then you will continue to incur penalties and interest and there could be a scenario where within a few months your total due could be about Rs 10,000, which is twice the original Rs, 5,000 you had spent on the card.
• Credit bureau: All the transactions that you conduct on your card and the amount and frequency of spend on your card are tracked and monitored. Additionally, the issuer also collects information on your repayment habits – do you pay on time or are you late, have you ever defaulted on a payment, do you pay in full or only partially. This builds your credit history. Credit bureaus are organizations that are a repository of your credit history. You can get a copy of your credit history for a small fee by applying to a bureau like the Credit Investigation Bureau of India Ltd (CIBIL) or Equifax India.
Don’t think that when you spend on a credit card, the sky is the limit and you don’t have to pay it back because you can always close the card or move addresses where no one will be able to trace you. Your PAN card is used to identify your records, and if you have defaulted or acquired a bad credit history, it will be very difficult for you to get a home or car loan, or a credit from another issuer.
