Personal finance: How to use a credit card
any of us rely on credit cards to pay off bills or withdraw money, but are we aware of the fine print?
According to data provided by the Reserve Bank of India, as of December 2020, there are 60.4 million credit cardholders in the country. The credit card debt in the same month was ₹63.84 lakh - arrived at by assessing the value of transactions at ATMs and point of sales (POS). The total number of credit card transactions in December 2020 alone equalled 174.7 million. Many of us rely on credit cards to pay off bills or withdraw money, but are we aware of the fine print? Here’s what you need to know when you use credit cards.
Credit rating matters
Your credit score depends on the regularity of your financial activity and how promptly you pay off your bills. Timely repayment of credit card debt will help build up your credit score that would augment the chances of getting loans approved. You miss a repayment cycle, and the result is debt piling up on your card. This gets recorded in your credit file, thus, impacting your credit score in the negative.
Higher interest rates
Many credit card companies offer bonuses for signing up for credit cards. The customers avail bonus points on having spent a certain amount within a certain period. These bonus points can provide discounts on other purchases. Cashback offers during seasonal bonanza sales also help you avail of discounts on paying with credit cards; sometimes you may even get a small amount of money back on paying with credit cards. Credit card companies make it seem attractive to use credit card to spend. But it’s equally important to remember that the money should be repaid else it will invite interest charges as high as 10% every day.
Nothing comes for me, so hold your horses before you revel at the sight of discounts and cashback offers. To avail discounts, you must earn bonus points that are not possible without spending on a sizeable point. This means that the whole idea is to make you spend using your credit cards. This is because merchants accepting payments via credit cards must pay a percentage of the transaction amount to credit card companies. The cashback that you get is simply a part of the merchant fees that the credit card company shares with you. Besides, there is a yearly cap on cashback rewards beyond which you cannot exceed.
Independent of currency
Credit cards can be used to pay bills in any currency. Though banks or credit card companies may charge currency conversion fees, you may use your card to shop at overseas online stores or pay during an international trip. Some credit card companies also wave off fees on international purchases as a reward for increased use. However, beware of rampant credit card use as it may cause you to miss a payment or carry forward a balance debt that will have to be repaid with fees and interest charges. In some cases, the charges can be high; combine that with Goods and Services Tax (GST), and you end up paying a hefty amount as a foreign currency mark-up fee.
Crossing the limit
You may want to shop till you drop dead, but your credit card company may have had other plans for you. There is a limit beyond which you cannot spend depending on the credit card you use. However, spending beyond the credit card limit can invite a hefty amount as a penalty. The minimum over-limit fees charged is ₹500 from where it can go up depending on how much you have crossed your limit.
Cash withdrawal charges
You have the option to withdraw cash from an ATM using either a debit or credit card. If possible, never use your credit card to withdraw cash. This is because of the high cash advance fees that could either be fixed or levied as a percentage of the amount withdrawn. The credit limits on different cards vary, thus, determining the cash withdrawal limit. In most cases, banks and credit card companies allow their customers to withdraw up to 40 per cent of the card limit. However, interest charges ranging between three and five per cent accrue immediately after cash withdrawals using credit cards. This means that a withdrawal of ₹10,000 can incur an interest penalty in the range of ₹300-500.
Not many credit cardholders are aware of the GST applicable on all credit card fees and charges. If you are someone who makes informed decisions on income and expenses, unbridled spending using credit cards may not be the right choice.
Personal Finance is a weekly feature that aims to provide our readers pertinent and helpful financial information