Friday, May 1, 2009

Credit Card - Pitfalls - PART II

·         Non Payment/Part Payment

Coming back to other ways the bank makes money out of credit card. When a customer is unable to pay the total outstanding due, it is advisable to pay at least the minimum amount due (MAD). Even when we pay the MAD, the card will be charged with interest @ 36% per annum rate (2.95% per month)!!


If we make part payment for a particular month (anywhere between MAD and Total Amount Due), we will be charged interest from the time we purchased the items and not from the billing date. So if I purchased the item on 9th of the month, I will be charged interest for the whole period of 60 days. That is from 09/08/08 to 08/10/08 (the third billing cycle).

If we are not able to pay even the MAD before or by the due date, we will be charged with Late Payment Fees. The fine depends on the type of card we are issued. A gold card will be charged higher fees when compared to a silver card. It can range anywhere between Rs. 250.00 to Rs. 1000.00!!

So if I am not able to make any payment from one billing cycle to another, I will be charged with both Interest and Late payment fees.

·         Cash Withdrawal

If we withdraw cash from our card, there are two charges that would be applicable to us. 1) Cash Withdrawal Charges. 2) Interest.

Cash withdrawal charges are usually a flat fee of 500.00 or 2.5% (depends on the card to card) of the amount withdrawn, whichever is higher.

The rate of interest charged is 36% pa. This amount is charged from the day we withdraw cash. So effectively, there is no interest free period for the cash withdrawn.

At the same time, when we are paying the amount after withdrawing the cash, we have to calculate the interest for the period and deposit that too. This has to be done because the amount that we pay to the card usually gets split the following way:

1)      Interest

2)      Other Charges

3)      Top-up features.

4)      Principal

So when we make cash withdrawal of 10k and make payment only of 10 k on the due date, there will be some principle amount that will be left as outstanding. The 10k will first be used for interest of that period, and then the cash withdrawal charges will be cleared. Finally the left over amount will be debited against the principal. We will be charged interest on that principal amount again in the next month’s bill.

·         Over the Limit Usage

Another charge is Over the Limit Charge. This happens when we unknowingly use the card for more than the prescribed limit. For example in a month I use the card heavily and forget the total amount I have utilized. So when I go for shopping again, I have only Rs. 5000.00 as my available limit. Instead I end up shopping for Rs. 10000.00. The credit card company will approve my transaction for Rs.10000.00 if I have a perfect payment history. They would not want a customer of theirs’ in an embarrassing situation.

Now, since I have over shot my credit limit, I will be charged will over the limit charges.

·         Unwanted Top ups

Credit cards have become a very sophisticated instrument from the time they were introduced. Many new products in the insurance arena have made keeping in mind this particular instrument. Insurance companies have tied up with various banks to offer their insurance product, both life and non-life, with the credit card. Some of the types of insurance offered on the card are:

1)      Mediclaim

2)      Card Theft Insurance

3)      Cover on credit card bill (in case the card holder passes away)

4)      Life Insurance (for Air travelling only), etc.

The premiums for these products are all charged on the credit card, usually on monthly basis.

If we have applied to any of these products, then it is ok. But usually we do not.  So how do they end up in our bills?

We are asked to fill a form while applying for the credit card. These products are there on the form. But due to negligence on our part, we over-look all of it. We just sign at the dotted line and give the form back to the agent, asking him to fill in the details. The agent in turn marks all these top-ups for us. And they end up in our monthly bills.

The best way to handle this is to fill in the form carefully. If you don’t want any product, put a cross in the check box. DO NOT LEAVE IT EMPTY.

In case they still end up in the bill, call the customer care immediately and ask them to cancel the product and reverse the charges. Do not postpone it because of the size of amount.

·         Free Balance transfer

Balance transfer is a tempting offer card issuers give to their competitors’ customer base. The offer says free balance transfer for 6 months. Well that is the case. However, not the whole balance is carried free for the six month period. A card holder needs to make a minimum payment, even in case of balance transfer. Therefore, basically it means that one can enjoy a period of 6 months as interest free if he keeps paying the minimum amount due. However, full payment has to be done for the purchases made in the new card after the balance transfer. They will not be a part of the interest free period.

Will come back with why should we pay back our bills and a few tips in the next one.


Pradeep Melchis said...

Hey great work Dev... Just a one off question... Was asked this in an interview as well.. Whats the reason for credit card rates being cheaper in the US than in India... Explanation in the form of a post would be gr8...


Pradeep Melchis said...

and just adding a point to the balance transfer, if I am correct, you are not allowed to transfer the whole of the balance by some banks. There is an upper limit to that as a percentage of the credit limit.

Devbrat Daga said...

Hey Pradeep, will try and answer them in the next blog over this weekend.. pls excuse till then..