Credit Card – Sin 1 – Not paying by due date

This is probably as big a mistake as you can do with your Credit Card. Consider the charges that this mistake will invite.

FIRST:

The bank will levy late payment fee which can be as high as 5% of your outstanding amount. That does not mean that if you have only 100 Rs outstanding you can forget to pay as probably next time you will pay 5 Rs as late payment charge. This is so because all the banks have a minimum late payment charge which can be as high as 300 Rs. It simply means that even if you have only 100 Rs due and if you don’t pay then you will be slapped with a penalty of 300 Rs.

SECOND:

Bank will charge interest which can be as high 3.75% per month… (That is not a typo, it is per month) on your outstanding amount from the date of transaction. This interest charge will also be applicable on any fresh purchases that you will do. So for a due of 100 Rs you will pay roughly 45% annual interest from the date of transaction and if you make any additional transaction from the date of your statement generation, even those transactions will also be charged at the same interest rate.

THIRD:

Not to forget, the late payment penalty and interest amount also invites Service Charge and Education Cess. So let’s say, your late payment penalty is 300 Rs then it actually becomes 300 + Service Tax (10%) + Education Cess (3% on Service Charge) making it almost 331 Rs. Similar charges apply for interest amount.

FOURTH:

Few banks also apply a transaction fee for every subsequent transaction that you do after you have missed your payment due date.

These charges apply and are computed from the date of your transactions to the date you have actually cleared the dues. Try to do some maths to find how ridiculously high these charges can be.

More to come…

Credit Card can also make you pay directly

The transaction fees earned from merchants is not the only source of income that Banks have from Credit Cards.

Sometimes you can also be a source of income for banks if you commit any of the following with your Credit Card...

1. You did not pay bill on time

2. You did not pay the full dues on time (part payment)

3. You withdrew cash from ATM with the help of your Credit Card

These three are probably the biggest mistakes that one can do with their Credit Card. Why these things are so serious... I will explain one by one.

To be continued...

Credit Card is not Free

So many of us are carrying the notion that Credit Card is such a convenient way of having money in your pocket without actually having to carry cash... and that too absolutely Free of Cost... WRONG.

I am certainly not talking about annual fees or extra surcharge that Credit Card companies levy.

There is a totally different economics that goes on behind the scene.

Consider this...

Bank gives you Credit Card and then you can swipe it at any merchant outlet in lieu of cash. You get the convenience of not carrying the cash, merchant has the money directly credited to his account. Win-win situation... isn't it?

What does the bank gain?

Bank gets a fee (which is generally varies between 1% to 3% of the transaction amount) that is done on the Credit Card and merchant has to pay this fee. The merchant risks of loosing the customer if he does not provide you the payment by Credit Card facility so he has no choice.

Does that mean that the merchant has his profit margins eroded because of Credit Card transactions... absolutely NOT.

He builds in the additional fee that he has to pay to bank in the price of the merchandise he is selling. By this way he actually gain more on the non Credit Card (cash) transactions as he get the higher price for cash transaction also.

So bottom line is that actually you end up paying higher price for the same merchandise by Credit Card than what you would have paid had you made payment by cash.

So even if bank sometimes act with Holier than thou approach and offer you lifetime free Credit Card, they are not loosing anything.

It is you who end up paying higher.

Hope I am clear in my communication and the notion that Credit Card is free is destroyed for few who read this.

Watch this space for learning the ways to get yourself on the other (winning) side following the same rules.

Lets begin...

I believe there is no need to explain what exactly Credit Card means but nevertheless I will delve in to some background of it before actually coming to main discussion.

One thing which I want to mention is using credit card wisely matters a lot more these days as it could be next worse thing to hit US financial markets after sub-prime. In case of sub-prime, at least the property is held as collateral but in case of credit card debts even that cushion is not there for banks.

So watch this space for much more information and also how credit card can be your best friend if used wisely. Your comments and suggestions are welcome.