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A credit card holder is entitled to a plethora of benefits like travel discounts, discount on retail loans, and free credit periods. To benefit from these, the customer i.e. you, are at the receiving end and should make use of these wisely. A credit card also helps in case of bigger purchases, as one might not be willing to carry large amounts of cash as well as the merchant’s unwillingness to accept cheques. Credit cards therefore, are a more convenient, acceptable and safer transaction medium.

A popular concern however is the excessive spilling over of credit expenses, which in most cases completely negates such benefits. The solution to this dilemma lies in adequate and updated knowledge of hidden costs behind your card. Here is a checklist detailing how credit card expenses spill over and the methods adopted in tackling these.

Non-payment of the amount due:
Not paying credit bills before the due date, may lead to the customer loosing the free credit card privilege and having to pay exorbitant interest charges (around 36% p.a.). Further, failure to pay before the due date, gives the bank the right to brand the customer as a defaulter.
A surefire way to minimize interest charges is to pay your dues on time to avoid late payment fee.

Revolving your balance:
Suppose you make purchases through a credit card amounting to Rs 10,000. On the due date, the bank gives you the option to pay part of the outstanding amount (say 5%). Having paid only the minimum amount due, the rest (Rs 9,500) is carried forward to the next billing cycle. A recent study shows that nearly seven out of ten cardholders do just this. By carrying forward a credit balance, you may end up losing your free credit privilege. This gives the bank ample opportunities to profit from such situations by levying heavy interest rates and also depriving you of grace periods on new purchases. The amount carried forward PLUS any fresh purchases get charged at an interest rate of a whopping 36% p.a. It is therefore recommended, to never revolve your balance.

Billing cycle
Making purchases keeping in mind your billing cycle can effectively help reduce interest charges. For instance if the due date on you credit bill is the 29th of every month and you use the card on 30th, your purchase falls in a grace period and is billed in the next billing cycle. Normally grace periods run into 15 days after the due date. A bad credit record or defaulting on payments would entitle the bank to cease this grace period. Using your credit card prudently by benefiting from interest free and grace periods, can make credit transactions a lot more fun.

Your expenses exceed your credit limit:
The Credit limit on your credit card is the maximum amount that you are credited, as dictated by your income profile. Banks generally do not make an extended effort to inform the customer when they exceed their credit limit but never forget to charge for the exceeded amount. Banks let you spend over the limit and then charge heavy interest. Banks do not provide for an automatic block on further transactions when you exceed your credit limit, and may charge as high as 5% on the exceeded amount. To benefit in full from your credit card, you must see to it that your expenses never exceed your total credit limit.

Bouncing of payment cheques:
Making the payment close to the due date and through a cheque can increase your chances of getting caught in a debt trap. Cheque’s may or may not clear in time and in some cases even bounce. In such situations you may be obligated to pay a fee for a bounced cheque plus late payment fee and also monthly interest on the outstanding amount. It is preferable to make the payment in cash before the due date to avoid late payment fee.

You transfer your balance from the other cards:
Transferring your balance refers to a facility offered by banks to transfer existing balances on other cards to another card that you own. Banks may charge zero or nominal interest rates for stipulated time periods. For instance, most banks allow a timeframe of three months, beyond which, you have to pay interest even on nominal amounts. Therefore, you must pay your dues in the accepted time period if you have transferred your balance.

You withdraw cash with your credit card:
Withdrawing cash from an Automatic Teller Machine (ATM) using your credit card, will entitle the bank to charge cash advance fees on such transactions. Cash advance fees are very high and are mostly in the range of 2.5% per transaction. This facility should be used prudently, as the interest rate is very high, usually around 38%p.a. Moreover, the cash advance fee is higher if you withdraw from an ATM that doesn’t belong to the bank whose credit card you hold. It should be kept in mind that when you withdraw cash, you start paying interest from there on, as against availing of free credit periods. So be cautious when you use this service.

Reading the terms & conditions carefully
Most importantly, you must read the terms and conditions carefully before signing on with a bank for one of their credit cards. This would help you determine the wide variety of benefits offered as well as hidden costs.
By taking into consideration the above points you can enjoy using your credit card while minimizing and in several cases nullifying hidden costs.
Not utilizing the various benefits offered by the bank (Retail discounts, travel discounts etc.), in connection with your choice of card, would imply under-utilization of your credit card.
Credit card usage also provides you with the service of reward points, where you are awarded points whenever you use your credit card. These points could be redeemed for gifts or select product purchases.

In a nutshell, you can benefit from credit cards in various ways; utilizing interest free periods, various cash back offers, and reward points. However, if you fail to pay your credit card dues before the due date, banks get the opportunity to charge you hefty interests.

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Ritul Says: Mon May 26, 2008 5:05 am Credit Card is a great tool to shop wen you are not carrying cash but repayment shud always be on time. Ravi Kumar Sharma Says: Mon Apr 14, 2008 12:48 am Very good and informative article. ranjana Says: Tue Mar 25, 2008 7:32 am Very good vision Ritika Says: Tue Mar 25, 2008 9:23 am Article is very informative! webmaster Says: Tue Mar 25, 2008 6:12 am Add Comments to give feedback Sivasankar Says: Mon Jul 28, 2008 8:43 am This article is very specific and informative about the credit management systems Saving Your Comment Leave Your Comment Name (Required) Mail (will not be published) (required)

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