How Credit Card Works?
Q. How Credit Card works? Also what I understood from yesterday's illustration is that even if we pay 'minimum amount due' still interest is charged on the outstanding amount. Then what difference does it make, if any?
A. The credit card offers us a pre-approved credit facility, wherein there is a grace period or free-credit period on the utilised amount for 20 – 50 days, based upon the type of credit card and date of transaction. After that, if the outstanding amount is not fully paid or if only the ‘minimum due amount’ is paid on or before the due date – then interest at the rate of 3-4% per month is charged on the outstanding amount from the transaction date till the payment date. In other words, the ‘grace period’ or ‘free-credit period’ is withdrawn in that case.
Paying only ‘minimum amount due’ doesn’t do much except save us from paying the ‘late payment fee’ which is otherwise charged. The late payment fee charged could be Rs. 1000 or some percentage of the total outstanding amount. Also by paying ‘minimum amount due’, our account will not be reported as irregular to the credit bureaus (CIBIL).
Q. So if I ask you to summarize the dos and don'ts of making a credit card payment, what would be that?
(1) DO make full payment of the due amount on or before the due date.
(2) DON'T make fresh transactions if you have not yet paid your credit card dues in full, as even fresh transactions (along with due amount) start attracting interest charges on daily basis till the time you make full payment.
(3) DON'T ever use your credit card for ATM withdrawals. Remember you do not get any credit-free period to make interest-free re-payments of the same. Credit card ATM withdrawals attract interest charges right from day one till the date of its repayment.
(4) DO convert big-ticket transactions into EMIs if you find that you will not be able to make payment of the entire amount before the due date.
(5) DO take a personal loan and pay the entire credit card outstanding amount in one go, in case things go completely out of hand. This should not be considered a routine thing to do. This should only be exercised in extreme cases. Take professional help by consulting your advisor for better management of debts.
