Things your Credit Card Company won’t tell you

Mrs. Pradita Nambiar, an MBA in Financial Management and a certified Equity Research Analyst, has worked with several top financial companies such as –  ANZ Grindlays Bank, HSBC, Escotel Mobile Communications & Bharti Airtel  for more than 12 years. She shares her valuable inputs with us.

A credit card is like a genie, but with a slight difference. The genie could grant us three wishes, but the credit card holds with it the power to fulfill our wishes beyond three. We go shopping for clothes, spruce up our home, book our travel holidays, buy movie tickets, groceries and the list is endless.

But do we really know what lies behind this shiny plastic card? Have we ever thought something more could exist beyond the annual fees, joining fees, card renewal fees, the reward points or even about the interest of a credit card?  The best way to get the best out of our credit card is to be more aware and use it wisely.

1.The Monthly Interest Charged
Most of us credit card holders pay a lot of attention to the annual fees, card renewal fees and add-on fees, but very little attention is paid to the interest charged. This is the key component on which the credit card business thrives. Most banks state the monthly interest charge which is around 3.15%-3.5% per month which is actually 42% annualized. “These kinds of interest rates remind me of the character Shylock in Shakespeare’s play Merchant of Venice, where this rich Jewish moneylender Shylock proposes a condition for the loan: if Antonio is unable to repay the loan by the specified date, he may take a pound of Antonio’s flesh,” adds Mrs. Pradita.

2. Learn how your Interest is Calculated
The interest is calculated using a simple formula = (Outstanding amount*3.20%*12)*no of days/365. So do your own math when you plan on paying just a part of your credit card bill and keep an outstanding amount. Mrs. Nambiar explains with the help of the following example:

On 1^st July, you purchased jewellery worth Rs.10, 000/- and on 10^th July a piece of furniture for Rs.5, 000/-. The interest on the credit card is 3.2%. Following is the way interest is calculated if payment is made in installments.

• Your credit card statement date is 20^th July and payment due date is 11^th August.
• Total outstanding amount=Rs.15,000/-
• Payment made on due date=Rs.3,000/-
• Balance carried forward=Rs.12,000/-

a)     Interest on Rs.10,000/- for 41 days(from 1^st July to 11^th Aug)=Rs.431

b)    Interest on Rs.5,000/- for 32 days (from 10^th July to 11^th Aug)=Rs.168

c)     Interest on 12,000/- for 10 days(from 11^th Aug to 20^th Aug, the next bill date)=Rs.126

d)    Total interest charged in Sept statement would be Rs.725.

e)     If the statement does not have any previous balance then there is no interest calculated.

3. Grace Period
There is something called a grace period during which no interest is charged by the credit card company. This period varies with every bank between 20 to 60 days. This is available if all previous dues have been cleared. This is the period from the transaction period to the due date of your credit card statement.

For example, a card holder whose billing date falls on 15th August can spend from 14th July to 15th August, and his bill will be generated on 15th August and due date will be 30th August. A purchase made on 15th July, gives him an interest free credit till 30th August i.e. for 40 days.

Therefore the wise credit card holder is the one who buys during the first few days of his billing period and makes full payment by the due date thus utilizing the full grace period.

4. Cash advance
“Just as you go shopping for clothes, jewellery, furniture, books etc you can also get cash against your credit card from the ATM. This is called Cash Advance,” adds Mrs. Nambiar. This is a disguised form of personal loan. Cash advance taken on a credit card does not enjoy any grace period and interest is applied till the amount due is cleared in full. As personal loans are today available easily and at convenient rates of interest, this option is eminently avoidable.

5. Late Fees
Late fees are charged even if the minimum amount due is not paid. This in most cases is not a fixed charge and varies with the amount outstanding.

6. Railway/Airlines/Hotel Surcharges
On every railway ticket purchased with your credit card, an additional fee of 2.5% is charged on the amount of the ticket. This may vary from bank to bank. These amounts may seem small but these charges make this industry tick. In the case of Airlines booking the customer is expected to present the credit card or a copy of the credit card used to purchase the ticket. Similarly, hotel bookings too attract bank charges which could be 5% extra.

7. Refunds
“This brings us to another interesting aspect, adds Mrs. Nambiar, “If any item purchased using the credit card is returned, then the amount is not refunded in cash. The amount will be credited back to your credit card.” This could take as long as 60days in some cases. Credit Card transaction fee is not refunded. However, non -payment of the original charge will continue to attract interest and it will be the onus of the cardholder to demand refund of interest charged on such transactions.

8. Fuel surcharge
“Most of the credit cards have a fuel surcharge, if used at petrol pumps; so beware of the extra charges on credit card transactions,” mentions Mrs. Nambiar.  These charges are waived off in some cards. Please note that these are waivers which are not automatic and needs to be initiated by the cardholder. For every cardholder who demands these waivers, there are hundred others who could not care less for such waivers, thus bringing in huge revenues for the card companies.

9. Purchase of jewellery
This too attracts extra charges and only 50% of the credit limit is allowed on jewellery purchases. This limit may vary with banks.

With inputs from Mrs. Pradita Nambiar.