Understand credit card fees & charges to save money

Understand credit card fees & charges to save money

Know how credit card issuing banks charge you under various heads. Be it annual fees, finance charges, late fees; if you know how they calculate it, you can use your credit card in such a manner that the costs are minimum.

How many times have you found your credit card bill confusing? You must have wondered those little fees and extra charges that normally inflate your bill. Credit card billing is perhaps one of the most vexing things after calculus or trigonometry. Yet, we cannot imagine living without credit cards today; hence, avoidance is no longer an option. What you can actually do is get to grips with the various fees and charges credit card issuers levy and learn how to work around them.

Annual fees

Most credit cards charge you an annual fee. The annual fee can be anywhere between Rs 200 and Rs 1000. The annual fee is charged irrespective of whether the card is used in the whole year or not. This is unavoidable.

Sometimes, card users may complain that they got a “No annual fees” card but they still see the annual fee in their bill. This is par for the course. Card companies offer no-annual fee scheme for a particular year or for a number of years. While opting for such a card, you may retain the impression that the annual fee is waived for life. This may be far away from reality. The smart thing to do is to check if the no-annual fee is applicable until the expiry of the credit card or only for a limited period.

Some card companies waive the annual fee on certain conditions. For example, the condition could stipulate that if more than 10,000 is spent in the first three months, the annual fee will be waived.

Late Fees

Late fee is the amount credit card companies charge you if you fail to pay the minimum payment required. It is charged in every bill cycle that you fail to make the minimum payment. These fees can be pretty high so it is advisable to make a habit of paying at least the minimum payment required to avoid late fee. A better alternative is to clear the month’s entire dues if possible.

The late fee can be as high as 2-5% of the balance. Typically, it is fixed for certain slabs of dues. For example, if the balance amount is Rs 20,000 or more, the late fee can be about Rs 500 to Rs 1000.

Cash withdrawal Fee

Credit cards are typically used for purchasing merchandise and other transactions. There’s also a facility given to credit card users to withdraw cash from ATM. The withdrawal limit can be anywhere between 30% and 40% of the credit limit. This, however, is a not a good feature to use. This is known as cash advance and there is fee for it, which can be a fixed amount or be based on the amount you withdraw. This fee is charged every time you withdraw cash from the ATM using your credit card.

This fee is apart from other charges you incur if you fail to repay this within the stipulated time. Moreover, you are charged an interest on the amount you withdraw from the date of withdrawal to the date you repay it.

Finance charges

This is the core of credit card charges. Finance charge is the interest you pay for not paying the full balance amount every cycle. Before you understand the finance charges, understanding billing cycle and grace period is important. Billing cycle is the time period for which the amount due is calculated. Grace period is the time given to you after billing cycle so that you can pay the bill. For example, your billing period can be one month from 5th of the month to 5th of the next month, with a 25-day-grace period.

As an illustration, assume your bill contains charges for whatever you purchased between 5th March to 5th April and your due date is April 30th. This period from 5th April to 30th April is the interest-free period because you do not pay interest in the grace period for your purchases. If you do not pay in full, your interest will start on the remaining amount. The interest can be as high as 2-3% per month which works out to an annualized percentage rate (APR) of 24-36%.

For example, if your balance is Rs 10,000 and you pay only Rs 5000, you incur interest on remaining Rs 5000 in the next month. It would be about Rs 100 at the rate of 2%. Moreover, if you haven’t paid your balances fully, you will not be given grace period for any future purchases. The interest will kick in as soon as you spend money. This is a double whammy for card users.

Hence, pay the balance fully within the grace period. Do not give in to the temptation of paying the minimum due, which is a convenient debt trap. Remember, you own the credit card and not the other way around.

 Happy Investing

Source : Moneycontrol.com