Credit cards can be a boon when used judiciously as they entitle you to advance credit and great rewards. But if you're careless with your card use, you could incur charges, penalties and a hefty interest rate.
To ensure that you use your card smartly and not get overcharged, make sure you are aware of some crucial charges associated with credit cards.
Joining or Annual Fee
While many credit cards come free of cost, i.e. no joining fees and perhaps exemption from annual fee for a particular period, the ones with bigger rewards and benefits generally tend to have a joining fee. Some may waive off the joining fee for the first year but may have it from the second year. Sometimes these charges are waived off if one spends up to a threshold specified by the bank.
Interest and Finance Charges
Most credit cards offer a 50-day interest-free period to pay for all spends. Some premium cards have finance charges regardless of where and when the card is swiped. But once the interest-free period passes, banks will levy an interest/finance charge to be borne by the customer if the full payment is not made on time.
Cash Withdrawal Charges
Credit cards also allow you to withdraw cash from ATMs. This option should be exercised only in emergencies. While there's an interest-free period for all other credit card transactions, the interest rate applies immediately for cash withdrawals. If you withdraw cash in an emergency, repay it as soon as possible to avoid the hefty interest rate.
Over Limit Charge
There is a charge if you breach your credit limit and cash withdrawal limit. For instance, if your credit limit is Rs 1 lakh but you have spent Rs 1.25 lakhs on the card, be prepared to pay a charge. Normally a percentage of the excess spend is charged as penalty. So make sure to keep track of your spending and if you think you need to make a big purchase deposit the deficit amount by cash to the card if necessary.
Late Payment Charges
A late payment on your credit card bill can be disastrous in many ways. Firstly, your credit score gets affected, and secondly, you have to pay a late fee each time you are late in paying dues. While some banks charge a standard late fee, some charge a percentage of the amount due as late fee. Some may even charge an additional fee if your ECS for the credit card payment gets rejected.
In case you don't have the full amount to repay your card, make sure to at least pay the minimum amount due, in order to avoid the late payment penalty.
Foreign Transaction Fee
Whenever a credit card is used for foreign transactions, whether online or at a point of sale, the bank levies a foreign mark-up fee. It ranges anywhere between 1.5 per cent and 5 per cent depending on the bank and the card. Cash withdrawals abroad are charged at a higher rate that card swipes. So when abroad you can carry enough cash or get a travel card to avoid these charges.
Balance Transfer Fee
A balance transfer is when you pay off the balances on existing credit cards or loans by transferring them to another credit card account. While many high value cards allow this free of cost, in some cases you may be charged a fee to complete the balance transfer - typically a percentage of the transfer balance. It is basically an expensive way to move money from one account to another, rather moving debt from one account to another, and you must avoid getting to this point by repaying your debts in a timely manner.
(Adhil Shetty is CEO of Bankbazaar.com)
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