If you have just received your premier signature card from your bank and are absolutely thrilled, just hold for a moment. Your immediate urge maybe is to go out on a shopping spree but did you know the costs you will be paying. Most cards announce fabulous offers and discounts on the usage of cards. The more you use your card, the more points you will earn and therefore the more you will stand to benefit. All that is fine, but you first need to know what the banks charge for your credit card. Do you really know the effective cost of your card?
Interest On Your Credit Card
By now you surely know that your credit card is just a convenient loan. But it is a loan that comes at a huge cost. If you pay your outstanding amount each month in full, then it is fine. But that is not how most people use their credit cards. Either people pay only part of their outstanding or prefer the 5% revolving credit facility. In either case, you are charged interest at 2.5% to 3% per month on your credit card. That is, nearly 40% annual interest; too steep by any standards. Effectively, if you pay just 5% of your outstanding amount on the card, then 3% of the outstanding will go as interest. That is why your credit card outstanding never appears to reduce.
Annual Maintenance Fee Gets Debited To Your Card Each Year
Many credit cards announce a waiver of AMC for the first year. That means you will be charged the AMC from the second year onwards. The AMC ranges from Rs.700 per year to even Rs.5,000 per year in the case of up-market credit cards. This will be added to your bill each year.
Cash Withdrawal Charges On A Credit Card
Credit cards will also allow you to withdraw cash against your limit. That comes at an additional cost. The cash withdrawal charge ranges from 2.5% to 10% depending on the amount withdrawn. This is apart from the interest that will be charged at 36% on the amount withdrawn. You are better off using your debit card to take out cash.
Charges On Certain Special Transactions
Most cardholders are not aware of this, but certain transactions attract a special charge, apart from the interest. Normally, when you buy gold on your credit card or you use the card for overseas transactions, there is an additional levy. Many merchants also charge you 2% extra if you pay by credit card. You must factor in all these costs.
There Is A Cost To Delayed Monthly Payment
When your card is issued, they will define your due date in each monthly bill. The bank will expect the credit to be received by the due date. Even if your payment is delayed by one day, there is an additional levy that is charged. Similarly, if you are approaching your credit limit and you exceed the limit even by a small margin, there is an excess limit charge that is imposed on you. And if you skip a payment, there is an additional cost.
Administrative Charges On The Card
Then, there are other administrative charges for special services rendered. For example, if you lose your card and ask for a duplicate card, there is a cost to you. Similarly, if you call for a duplicate credit card statement then you will be charged for that too. Above all, be very careful that the cheque issued by you is not dishonored by the bank. In that case, not only will your bank impose a dishonor charge on your bank account, but your credit card company will also impose a penalty that will be a multiple of the dishonor charge.
If That Is Not Enough, You Will Also Pay GST And Surcharge On All These Charges
That is the statutory catch for you. When you get billed a host of charges, that is bad enough. On top of that, you will also pay the GST at 18% and the cess on all these transactions. That also adds up to your overall cost.
The moral of the story is that your credit card does impose a steep cost on you. If you take your last 1-year credit statement and add up all the costs and measure that as a percentage of your credit limit, you will get the actual picture. That cost will range from 50% to 60% of your credit limit. You really need to take a call on whether the entire effort is worth it. Of course, a premium credit card may add panache to your wallet, but it comes at a huge cost.