Credit card caution: use it wisely

With the Supreme Court coming down hard on credit card companies for charging exorbitant interest rates - in excess of 42 per cent a year in many cases - card users can breathe easy, at least for sometime.

Credit card companies, on their part, have argued that they need to charge these rates from the 'existing cardholders' for a variety of reasons - cost of courier, cost of marketing, cost of rewards and loyalty programmes and many others.

The figure - over 42 per cent a year itself, reminds one of all the 60s and 70s Hindi movies, where a village moneylender charged usurious rates of interest. And the inability of villagers to pay puts them in a financial hellhole.

In case of a credit card user, the situation can become quite similar. But here, usually the problem is irresponsible use. Also, a very few take the trouble of reading the card statement properly, which would make them aware of the all the small charges that the card company imposes, even for small requirements like generation of a new pin number or duplicate statements.

In other words, a credit card is simply a slickly-packaged, but atrociously-priced personal loan. It has its utilities, but the charges far outweigh the benefits.

Here are some of the regular costs

Interest cost: The biggest one. This can range from 2.79 - 3.9 per cent per month.

Late payment fee: Credit card companies charge Rs 350 per month on outstanding amount less than Rs 10,000. For outstanding balances between Rs 10,000 and Rs 20,000 the charges are Rs 500 and can go up to Rs 600, for higher amounts.

Overdraft limit: There is a charge if a customer exceeds the credit limit. This varies from issuer to issuer.

Overdue: For overdue accounts and payments that companies collect by sending an executive to the customer, there is a fees of Rs 75.

Cash advance: If the card holder withdraws from the ATM, there is a charge of 3 per cent on the total money withdrawn or Rs 300, whichever is higher. For money drawn through a branch, credit card companies levy an additional fee of Rs 500.

Joining and annual fees: Considering the competition in the credit card apace, a lot of banks entice customers with no joining fees. Later the card holder is charged the annual fees.

Duplicate statement fee: The card issuers, for instance Standard Chartered, charges Rs 25 per statement if the requested statement is more than three months old. Issuers such as SBI [Get Quote] Credit Cards charge Rs 100. (In fact, most representatives at SBI quote a charge for duplicate e-statements as well).

Foreign currency transactions: Transactions outside the country are converted into Indian Rupee at a rate suggested by Visa/Master (network infrastructure provider). Apart from charging 2.5 per cent on foreign transactions, banks levy an extra 1 per cent towards reimbursements to Visa/Master.

There are other charges on cheque return, pin replacement, card replacement and outstation teledraft.

And it does not end there. Even the government penalises expenses on credit cards by charging the customer a service tax of 12.36 per cent on the total value of the transaction.

However, even a customer who may roll over, yet prepays as much as possible, (above the minimum 5 per cent) does suffer because of the way the interest on the outstanding amount is calculated. Let's take an example of how credit card companies charge. Typically, most credit cards allow a person to pay between 5-10 per cent of the outstanding. The rest can be rolled over to the next month.

But even if the card holder prepays a good 40 per cent of the outstanding bill, the card issuer does not take into consideration this paid amount. Instead, the credit card company keep charging interest on all the transactions made until the entire outstanding is paid off. (See interest pinch)

INTEREST PINCH
	Transaction Details	Transaction Amount (Rs)
1/7/2008	Shopping	50,000
5/7/2008	Shopping	40,000
5/7/2008	Dinner	10,000
21/8/2008	Payment Made	40,000
25/8/2008	Groceries	4,000
8/26/2008	Petrol	2,000
Interest on the entire outstanding balance of Rs 100,000 at 3 per cent a month (July 30 - August 21 - 23 days). Though Rs 40,000 is paid, the interest is charged on the entire Rs 1 lakh and not on Rs 60,000
Interest on Rs 60,000 (remaining balance, after Rs 40,000 is paid) at 3 per cent a month (August 22 - till  August 29)
Interest on Rs 4,000 at 3 per cent a month on groceries from (August 25 - August 29)
Interest on Rs 2,000 at 3 per cent a month on groceries from (August 26 - August 29)
Next Month if he just pays the minimum he will be charged 3 per cent on Rs 66,000 and any fresh purchases done

As it is clear from the example, even though there is no outstanding balance on June 29, but expenses incurred in August are hitting him very badly.

Similarly, cash advances too rob the cardholder of the grace period. In fact, when cash is withdrawn using a credit card, the interest is charged from the same day onwards. In other words, there are a large number of costs that you have to incur in order to maintain a credit card.

If not used diligently, credit cards can cause a real strain on finances. Of course, the best way to deal is to keep them as a convenient payment mechanism and to limit purchases. More importantly, it is pertinent that all bills are cleared at the due date.

This will ensure that you do not carry forward any balance and, in turn, not incur any exorbitant interest charges. Simple isn't it? But it is like an excellent weight loss plan that few ever implement.

(http://us.rediff.com/money/2008/sep/15perfin.htm)