Important tips to use credit cards effectively

Credit card is a tool like any other financial tool which should be used responsibly. While it ensures cash flow, I don't advise customers to borrow for a longer period of time. It is meant for borrowing for short-term or limited period of time, says Citibank's business manager, cards, T.R. Ramachandran. Read on to understand the basics of credit cards. 

Q. Is it important to have a credit card? What are its benefits?
You get 45 days to pay up the bill. Many companies also give rewards like airline miles, free fuel and retail discounts. Credit card is an important financial tool for those who need to take advantage of payment mechanisms like interest free period or short-term credit.
 
Q. What do banks gain out of free credit of 45 days or lifetime free card where you don't charge any administration charges?

Annual fee is waived off in some situations. But it is important to know that interest is charged on the credit once the interest-free period gets over. It doesn't mean that you can return money after six months or one year without having to pay any interest. It is free of interest for first 45 or 50 days but after that you have to pay interest. Interest money comes as income for the banks.

Those who pay up the entire amount in full within 30 or 45 days are called transactors.  Transactors only transact on the credit card and do not utilise it as credit instrument. The customers who make partial payment after the last date are charged interest on it. Interest is charged on the money that revolves after the grace period of 45 days.

If you don't pay by the due date, you have to pay interest on the new expenditure from day one. If you revolve the credit once, and when next time you shop through credit card, it is possible that your fresh shopping on the card is also treated as outstanding dues. It is treated as overdraft account. As you withdraw money from an overdraft account, your interest meter begins to roll.
 
Q. Many companies are advertising lifetime free credit cards. Should we read between the lines in such offers? How can these companies earn with such offers?
When a person uses credit card to shop or pay hotel bills, the companies charge a discount fee. For example, if you spend Rs 100, the credit card companies pay Rs 99 to the merchant where you have shopped and charge 0.5 to 1% as fee from the merchant. The other way the companies make profits is from the interest charged from customers who don't give back the credit within the 45 days or revolve credit or use credit card as an overdraft. So the merchant discount fee and income from interest are the two main income sources for the credit card companies.

Q. I have landed myself in a financial mess with wrong usage of my credit card. I have given along with the minimum balance a fine for a period of six months. I couldn't have paid more than this. My income is not enough to pay off the outstanding dues. What should I do?
You should contact the company immediately and ask for a settlement plan if your credit revolves over six months. Generally banks give the opportunity to repay in fixed installments over a period ranging from three to 12 months. You should stop revolving the credit with immediate effect once you back.

Credit card is a tool like any other financial tool which should be used responsibly. While it gives cash flow, I don't advise customers to borrow for a longer period of time. It is meant for borrowing for short-term or limited period of time.

Interest rate on credit cards ranges from 2.5 to 3% per month. The settlement plan will allow you to convert the credit card into a loan. You will be charged interest on loan and also on conversion from credit card to loan in order to not allow credit card to revolve any more.

Any conversion charges or administrative charges involved? There is no fixed interest rate as such. The interest rate varies from customer to customer. The plan is structured on individual requirement of the customer.

Q. Will it be wise to raise a personal loan to pay off my credit card debts?
You should not keep more than one or two credit cards even when it comes free of cost. Secondly, if you have borrowed on 3-4 cards, you can consider balance transfer scheme that some credit card companies offer. The scheme allows you to transfer the balance from 3-4 cards to one credit card. The balance transfer carries very low interest rate for three to six months. So if you have the ability to pay in 3-6 months, opt for balance transfer. But if you have to repay over a long period of time like 12, 24 or 36 months, it is better to raise a personal loan. Interest rate is generally 30 to 40% cheaper than a regular credit card, in the balance transfer scheme which involves consolidation of balance.

While personal loans are cheaper than balance transfer or credit cards, you don't have flexibility to repay as you have to repay personal loan as EMIs. You don't have flexibility to repay like 50% or 40% money. But if you are thinking of structuring the credit card bill sfor 12 months, 24 months or 36 months taking into account your cash flow, I definitely advice you to take personal loan.

Q. I have two credit cards and want to apply for two more. Will it increase my income tax liability?
Keeping more credit cards doesn't increase your income tax liability. It is one in 6 rules of the income tax where automatically your name comes up on the income tax radar like in case of club memberships, telephones or trips abroad. My advice is that you should not keep more than one or two credit cards.
 
Q. Does a customer get rewarded for paying bills on time?
Citibank and some other banks have such rewards. We reward customers on the basis of good behaviour, good credit bureau track record and regular payment of dues. The customer's account is evaluated every six months. Monthly interest rate for new customers is 2.5-2.95%, whereas customers with good track record have to pay only 1.99 to 1.5%. Based on good track record, customers with good credit behaviour get rewarded.
 
Q. Do companies charge more interest if I pay credit card bill in installments?
While evaluating credit card interest rate, you have you keep in mind one thing. For example, you used the credit card for two months, first 45 days you give 0% interest rate and then pay 2.9% interest rate from second month. So if you include interest free period at the time of interest rate calculation, interest rate is lesser than 2.9%. Interest free period of 45 days also needs to be taken into account. Secondly if you are paying in installments, like any other interest product you will have to pay interest when you withdraw. Interest rate is based on the fact that for how long period the customer revolves or uses the credit card for.
 
Q. Sometimes customers withdraw cash on credit cards. Is it right or an expensive preposition? How much interest rate is charged on it? 

Cash advance feature on credit cards is supposed to be used in emergencies. It is not like withdrawing money from ATM or salary account. You don't have any interest free period on withdrawal of cash like in case of purchases. Interest meter starts from the first day and the interest rate is generally 2.5%. Using credit card for cash is like withdrawing from an overdraft account on which interest rate is charged. Therefore the customers should use the cash facility on the credit card only in emergencies or when you are traveling and not in the normal course.
 
Q. If a customer exceeds credit limit or over spends, what interest rates will be charged from him? 
Most credit card companies don't let you spend more than the prescribed credit limit and to make this sure the companies have their own automatic systems. But for special customers who have good track record or for old customers, the computer allows the transaction 5-10% above the credit card limit. However, you will have to give interest on that transaction which the computer allows you to carry out.

Source: Aapka Paisa