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Aug 04, 2011, 07.10 PM IST | Source: Moneycontrol.com

Credit card: Spend 1 lakh, pay 2.62 lakh

SO you have one of those gold credit cards that offer you a credit limit of Rs 1 lakh? Great, but does that mean you can make purchases till the maximum credit limit. No, even when you pay your dues on time, this is best avoided.

Credit card: Spend 1 lakh, pay 2.62 lakh

SO you have one of those gold credit cards that offer you a credit limit of Rs 1 lakh? Great, but does that mean you can make purchases till the maximum credit limit. No, even when you pay your dues on time, this is best avoided. Also, there is no upper limit to the interest rates charged on credit cards. Let's recount a case about the rising interest rates levied on credit cards.

Recounting the case
A consumer group, Awaaz had moved the National Consumer Commission in 2008 over the rising interest rates that sometimes touched 90 per cent for defaulters including hidden costs.

The consumer group's argument centered around the fact that there was no check on the rising interest rates levied by the banks on credit card users and defaulters.

RBI's policy states that banks are free to exercise their right in determining interest rates that fall under the category of non-priority sector personal loans, regardless of the size, without referring to the benchmark prime lending rate (BPLR).

 

 

 

 

The commission had set a cap of 30 per cent on the interest rate for credit cards, which was to be brought into effect by February 13, 2009. However, in September 2008, the Indian Banks’ Association, appealed against this move to the Supreme Court. They argued that the policy on late repayment fee on credit cards is not stated explicitly by the RBI and only the RBI had the right to determine guideline policies associated with credit cards.

Following this appeal, the Supreme Court stayed the order of the National Consumer Commission in the first week of February '09. As legal battles go, we do not know the result of this, yet.

Also read: What are the various charges on credit cards?

What does the case have to do with you?
Simple! You might as well pay up your credit card dues on time to avoid high interest rate and long drawn legal battles. Also, remember if you do not pay up for two consecutive months, you will be considered a defaulter.

Why do I need to pay up more than just the minimum amount?
Read what Swathi Singh did and you'll know why.

Swathi used her credit card extensively; more than 80 per cent of her credit limit of Rs 150,000. She had the habit of paying up only the minimum amount due before the due date.

Once her expenses on the card amounted to Rs 100,000. She, of course, paid only the minimum due. So, guess how much interest she had to eventually shell out at the end?

Expenses
on the card
Minimum amt due 5%
of Rs 1 lakh
Annualized
interest rate
Total interest
repaid
Total cash
outflow
Rs 100,000
Rs 5,000
38%
Rs 162,000
Rs 262,000


 

 

 

 

 

Remember: This is calculated without taking into account her future expenses on the card, assuming she does not use it after this particular billing cycle.

Also read: How your credit card works

Why is there a minimum amount?
To avoid a late payment fee, which varies from bank to bank. If you do not pay this minimum amount, not only will you be paying a penalty, you'll also be paying interest on the balance carried forward.

Now, that's what we call paying through your nose. You'd certainly want to avoid being in the same situation, which means you need to keep a close tab on your expenses. And, how do you do that?

- Never default a payment
- Be aware of your credit limit
- Understand how charges are applied:
In case of card purchases: There is a 30 to 45 day interest free credit period
In case of cash withdrawal: There is a withdrawal fee of about 3 to 3.5 per cent of the amount withdrawn
- Repay the full amount due, if you cannot, try to pay as much as possible beyond the minimum payment due
- Utilise your credit card only up to 30 per cent of your credit limit
- Limit the charges levied by your credit card company up to around 10 per cent of your credit limit
- Do not draw cash using your credit card. Interest rates that are applicable for purchases on cards apply, which is in the range of 2.7 to 2.85 per cent on a monthly basis translated to an annualized rate of around 38 to 40 per cent

Enjoy spending on your credit card within reasonable limits and never delay repayment of your dues.

Read: Soon, get your credit report from your bank

Illustration: Vipurva Parekh

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Abitha Deepak is Head of Content & Research at BankBazaar.com - An online marketplace where you can instantly get loan rate quotes, compare and apply online for all your personal loan, home loan and credit card needs from India's leading banks and NBFCs.

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