EMI is a common household term today, as more and more people are availing different kinds of credits to meet their financial needs. The same is applicable to outstanding amounts in credit card dues which the customer may find difficult to pay in one go. Is the EMI facility on credit card payments a good option or does it come with strings attached? Let’s first understand what EMIs in credit cards are.

When you make a purchase using your credit card, you can make its payment by any of the following ways:

• Make the full payment of the card on the due date
• Make a part payment and pay interest on the unpaid amount till it is repaid
• Pay the outstanding amount in EMI

The third option is when the amount can be paid back to the credit card company in equal parts. EMI in credit card dues thus works like a loan, wherein you pay off the outstanding amount equally during the pre-decided tenure.

The card issuer usually specifies the conditions that only specific purchases of certain amount from select stores would be eligible to avail the EMI benefit. While this option is generally available at the time of making purchases, some banks offer the facility of opting for EMI option even at a later date or on outstanding dues on the card. A credit card holder must ensure at the outset that the issuer of the card has given an option to avail this facility as it is not available across all kinds of cards.

Forms of EMI payment:

• Most EMI options on credit cards carry an interest rate. This interest rate is generally lower than the normal interest rate on the credit card. The EMI is made up of two variable components- principal amount and interest rate. Assume you make a purchase for Rs. 15,000 and opt for EMI option at a monthly rate of 1.5% over 6 months. The total outstanding amount is first calculated, which is then broken up into equal payments over 6 months, comprising of both principal and interest components. The component of interest amount is higher in initial years and decreases over the years. The component of principal amount is lower in initial years and increases over the years.

• You can avail an interest-free EMI option on certain purchases. So if the purchase amount is Rs.15,000 and you opt for a 6 month EMI, then this will translate into six monthly payments of Rs. 2,500 each. However, this could be a short-duration promotional offer where there are no charges at all. It can also be applicable if you are transacting at a retail outlet that has a tie-up with the bank. Further, in this case, you must evaluate to check if the discount on the product is taken away when you opt for EMI option. For instance, the product worth Rs.15,000 may be available for Rs. 13,000 without the EMI option.

In both the above cases, the customer is charged a one-time processing fee which is a percentage based on the transaction amount. This percentage varies from bank to bank.

Options to mitigate the EMI Risk

The credit card companies have many shrewd plans to extract maximum interest from the unsuspecting customers. They design products in such a way that they always stand to gain. Some banks do offer Insurance on EMI so that in case of an emergency the insurance takes care of your minimum dues for certain period but not the entire amount. However, you’ll have to purchase insurance upfront with a premium. Thus, the options to avoid paying higher interest when taking EMI facility from credit cards are limited.

Drawbacks of availing EMI option on Credit card dues

• If you opt for an EMI facility, the EMI amount will get reflected on your monthly credit card bills along with your other dues. If you fail to pay your credit card dues in any month, you will be charged a hefty interest of anywhere between 24%-36% for non-payment. This interest will be charged on your EMI amount as well, which already carries the basic interest of the EMI facility, causing a double whammy.

The customer gets an impression that the amount being repaid is being treated as a separate loan and once the EMI starts, the entire card limit can be used again. But it is not true as till the total amount is paid, one can only use the remaining limit from the credit card. If you want to repay the entire outstanding at one go, there is a prepayment penalty. Most banks will charge you 1%-5% on the outstanding. Moreover, if you forget to pay EMIs, there will be an extra interest cost involved.

Therefore the need for discipline in all kinds of spending through credit cards is essential for smart financial management of personal expenses. Any big ticket buy through credit card without sufficient funds to make the payment in one go can result in huge interest burden subsequently. Such offers need to be carefully evaluated on a case by case basis to see if there are any savings by the cardholder before taking it up.

The Banking Codes and Standards Board of India (BCSI) have prescribed self regulatory norms through which credit card issuers have to treat their customers. Next time you apply for a credit card do remember to have these norms in mind and extract the best service from the provider.

Information

The credit card provider is expected to give you complete details of the fees, interest charges, billing methodology, penalties, renewal and termination procedures by way of explaining and also providing you with a detailed service guide/booklet giving all the details. A copy of the `Most Important Terms and Conditions’ has to be given at the time of application itself to the customer.

Yes or No

Once the customer has shown interest in applying or has already applied, it is the duty of the provider to clearly state what will be turnaround time for the application, meaning, in how many days will you know whether you application is accepted or rejected.

Online Alerts

The provider has to provide online alerts (which could also include mobile alerts) for any transaction above Rs 5000 where the transaction is a “Card not Present” transaction like net based purchases etc.

Credit Card/Pin dispatch

The customer can receive the card/PIN at the mailing address or alternate address or in case the customer wishes he has the option to physically collect the Card/PIN from the branch of the provider. Also for safety, the PIN will always be sent as a separate mail.

Activating card

In cases where the bank activates a card without consent from the customer and charges any bill/fees for it, the bank is liable to pay a penalty amount equivalent to twice the value of the charges.

Immediate information on Limit reduction

The bank is expected to immediately inform the customer by SMS/Mail in cases where the credit limit is decreased and simultaneously also send a written communication

Loans/Credit facility/Enhancement

Any increase in credit limit or extension of loan can only be done after getting a written consent from the customer.

Credit card Statements

The bank has to send a statement on a pre-determined date and free of cost to all the card holders. In case of non-receipt of statement and complaint by the customer regarding the same, the bank is expected to immediately send a copy of the statement, free of cost.

Notice Period for changes

Any changes in fees, charges and terms and conditions can only be effected after giving at least one month’s notice along with the monthly statement. Only in cases where there is a change in interest rates and regulatory changes the bank can implement them with effect from the date of announcement.

Evidence for transactions

The bank is bound to show original proof of any contentious transactions where they do not accept the customer’s contention. The customer has to be given all the details he or she asks for in cases where the customer feels that he does not recognize a particular transaction.

Get better service from your card giver. Use the above details to ensure that your card provider gives you the service that you deserve. And in case it is not upto the mark, you can lodge your grievance with the Banking Ombudsman.

Credit cards that tell you “buy now, pay later” are a great convenience when your cash is stretched for purchases. However wise use of credit cards is very important for your financial health. A typical free credit period in India is 45-51 days.

If you pay off the dues within this period, the interest is saved. If in case you are unable to pay off the entire amount within the due date, a common practice is rolling over the dues after paying the minimum amount. This could be expensive as you would have to pay an interest of about 3 % per month and the new purchases made will not get any interest-free period until the dues are completely settled.

So, here’s a quick look over the other schemes offered by card companies to clear off credit card bills.

Balance Transfer:

If you opt for Balance Transfer, you can transfer the outstanding balance from one card to another, and thereby extend the repayment period.

Process:

Balance Transfer can take place between any two banks. The process takes 7-10 working days and a processing fee, a maximum of 2%, will be levied. Low interest rates or sometimes zero interest rates are available for balance transfers.

Points to be taken care:

Check for hidden charges or if the bank charges a transfer fee in additional to the processing fee. The low interest rates the banks offer on balance transfers may be for an introductory period (say 3-6 months) and once this period is over, it may return to the normal rates.

It is important to note that the credit limit of the card on which your new due is, will be reduced proportionately. Also remember that the balance transfer amount will be limited to a maximum 80% of your credit limit.

EMIs on Credit Cards

If you are having a problem in paying the entire credit card bill at one go, another option is to convert it into EMIs. This facility is similar to a personal loan. But here, unlike personal loans there is no paper work and no waiting for approvals either.

Another advantage here is that you need to pay a lower interest rate of about 1.5% to 2% (each month) whereas the normal credit card rollover interest rate is higher than 3%. Also, while this scheme is running, one still gets the interest-free period on new purchases.

The Process:

Banks normally have tie-ups with selected merchant establishments for EMI conversions of purchases.

In most cases, you have to pay a one-time processing fee. Some banks offer interest-free EMI schemes by asking only processing fees, while some levy both. Even the latter is still cheaper than the rollover facility of cards.

The pay-back tenure varies across banks and types of cards and so is the minimum transaction amount that can be converted. For many banks, a customer at a time can convert only a maximum of three large ticket transactions.

Points to be taken care:

It is very important to understand what you are paying and how it works to make sure that you don’t end up paying too much. For example, you purchase for Rs.1000/- and opt for a 12 month repayment. The EMI at a monthly reducing balance of 1.5% is Rs.91.68/-. It means a yearly 18% interest on reducing balance or a flat interest rate of 10 % (1.5% x 12 months). At the end of 12 months, you have paid 10 % more than the product’s actual price. And, not to forget the additional processing fees that may be levied.

Banks are quick to call you and offer to convert a purchase into EMIs. Before you agree, ask about the processing fees, interest rate, prepayment charge and flexibility in time periods. Also note than if you miss a payment, the rate will jump to the regular.

Banks run zero percent interest programmes for EMI conversions at merchant establishments to lure customers. They are a great relief to those customers who struggle to pay off the entire amount due at one go. But here also, a processing fee is charged from customers.

The credit card market is highly competitive, so always try to find the card that can benefit you the most.

Try to lower your interest rate. Negotiate with your bank. One other way is to convert your credit card debt into a personal loan debt. It will definitely be lesser than the credit card interest rate. Calculate your net worth and see if any of your investments could help you prepay a part of your loans.

Akash was an IT employee who was well settled in his career. With a take home that more than met his needs, Akash decided to invest in his future. Let us see how he managed his finances. He applied for a car loan and a home loan. The car was worth Rs.10 L, a bit of an indulgence but then he had always wanted to own the brand. He then invested in a premium  upmarket 5-bedroom apartment. His spouse Sheela tried suggesting that they should not be so extravagant but to no avail.

She had recently given up her job to take a break and spend more time with her one year old child. With no bulk savings for the immediate future she was worried about the manner in which Akash was spending the sole income they had. To top it off he invested all the money that remained from spending on the EMIs and  his monthly expenses, in stocks. This was the year 2007. They were managing fine till Akash’s stocks started tumbling in 2008. Instead of choosing another avenue, Akash started buying more stocks as they were cheaper during this period. The real shocker came when Akash was laid off when the global recession hit and his company had to cut back on resources to counter the effects.

How did Akash cope? How did he manage to pay his EMIs?

Akash did one smart thing though. He decided to approach a debt counseling centre for his financial hassles. They showed him the right way to manage his finances. They also mediated between him and his bank.

Luckily for him Sheela had an ancestral home back in her home town, which was bequeathed to her. She also had some fixed deposits and some gold that she had invested her savings in when she had an income. Based on the debt counselors’ advice, she obtained a loan against her property. She then helped Akash pay  a portion of the money towards his home loan and another portion towards his car loan as part prepayment. He also obtained written consent from the bank that he would resume repaying his loan once he got a job. In such situations banks do oblige you if you manage to repay most of the money or part of the money if not all as it was a better deal than no money at all.

Sheela whose industry was not so badly hit by the recession went back to  her old job while Akash took a break and got to spend more time with his son. Fortunately for him, his peace of mind was restored thanks to Sheela’s timely aid and the debt counselors’ help.

Six months later he managed to land a good job with a reasonably good pay, though about 20% lesser than his previous pay. He resumed his EMI payments and as banks were slashing interest rates he again negotiated with his bank for a lower interest rate. As it timed with the pressure from RBI on banks for lowering interest rates for existing borrowers also, he managed to come to an understanding with his bank. Agreed, not all can get as lucky as Akash. It was a pretty close brush with fate for him and he could have fallen in a abyss of debt! Yes…he got very very lucky indeed.

However, Akash learnt a valuable lesson for life. He started following simple but smart methods to avert a future disaster.

a. He put aside three months of his pay into a separate account meant to serve as an emergency fund. He planned to put aside 3 more months of pay into that account.

b. He ensured that his current EMI did not exceed 40% of his current income. He manage prepay his home loan at regular intervals to bring this under control.

c. He with the help of Sheela managed to keep his monthly expenses including his loans within 60% of his income and put aside the rest as savings and investment

d. When he invested now he took care to diversify his portfolio and not stick to equities alone to survive a future stock market crash.

Here are some suggestions if you are stuck in debt and do not know how to cope.

- Try to lower your interest rate. Negotiate with your bank. One other way is to convert your credit card debt into a personal loan debt. It will definitely be lesser than the credit card interest rate.

- Calculate your net worth and see if any of your investments could help you prepay a part of your loans.

- Make a contingency plan for the immediate future. Talk to your bank along with your debt counselors and explain your situation and see if you can resume your loan at a later date but do make an effort to prepay some amount.

- If it is a double income household try and see if your spouse can support you in the event of a job loss in the short term before you land a job, in case you are suffering from a lay off.

- Manage your current finances judiciously to battle through the current situation and emerge wiser.

When in need of urgent cash many people resort to taking cash advance from their credit cards. It is interesting to note that unless the outstanding amount is settled in time the credit cards charge up to 45% interest on annual basis on the unpaid amount till such time the dues are cleared. This is clearly a huge interest to pay in the current scenario. Additionally when there are outstanding dues any further expenditure made is also charged at the hiked up penalty rates of interest. In many cases people take personal loans to settle the outstanding dues of their credit cards. There are differing views on this kind of financial management as the losses in terms of interest paid are high in both cases.

In favor of the Credit Card cash Advance

There are a few definite advantage of taking cash advance through the credit card which is the reason why so many people use it in the first place. Some these benefits are:

• There is absolutely no delay in sanction as one can just walk up to an ATM and withdraw the money.
• One has the option of drawing exactly the amount that is needed and not more.
• There is no requirement to approach any bank and the money is accessible from remote locations in case of emergencies.
• Repayment schedule of the cash advance is as per choice of the burrower and not as per the banks fixed schedule.
• There are no prepayment penalty charges for credit card cash advance.
• In case one is able to clear off the dues within the interest free period then this option works out to be the cheapest.

In favor of the Personal Loan

Since one avails such facility during period of urgent cash requirements the chances that one will be able to pay off immediately afterwards are less. In case of a credit card if one cannot pay back in time the costs are prohibitive. However in the case of personal loans:

• The repayment period is suitably long to give the burrower some breathing space while repaying.
• The interest rate of a personal loan though higher than other loans is still less than half of the penal interest that is charged on outstanding amount of credit card dues.
• The amount that one can withdraw through a credit card cash advance is limited while in case of personal loans the amount is much more which can make a significant difference to needs of the burrower.

Illustration:

If the burrower had a balance of Rs. 50,000 on his credit card dues for which he will be paying interest @ 36% p.a. Let us assume that he can pay only Rs. 5,000 per month. At this rate, he will require 13 months to completely clear this debt and would end up ended up paying an interest of Rs. 10,368. But if he decided to take a personal loan of Rs. 50,000 instead to pay off his credit card bill with interest @ 18% for 1 year, his EMI would come to Rs. 4,584. In this manner he will manage to clear his debt within 12 months at a total cost of Rs. 5,008 only, thereby saving more than 50%.

While both the means of raising instant funds have their own pros and cons it is for the customer to decide as per his own financial status.

When we talk about credit card usage we find different people managing it in a different way. Some people are highly disciplined and never default on their monthly installments and others are so messy that they are always on the top of the defaulter list. Managing finance is a complex task and it’s very easy to fall into a debt trap if you misuse the power of free credit. Credit card provides you the power but it never suggests that this power is unlimited. You have to pay the dues back at the end of the free credit period but somehow the human mind doesn’t listen. To avoid getting into trouble in future it’s advisable to understand your credit personality and choose the credit card which suits you the best. Credit card companies provide credit cards with different features like different interest rate, different reward structure, different credit limits etc. If you understand the way you deal with credit it gets easier to choose the best combination for you. Let’s see what kinds of credit personalities exist and what card they should opt for.

The Beginner

You are just out of college enjoying your first job. You never had surplus money and hence no financial planning was required. You have never used credit previously and find the concept amazing. As expected, you are in a hurry to apply for one.

For beginners it’s advisable not to go for cards with high credit limits. You still do not know how you are going to use your card. Your financial wit has never been tested so better be cautious. This is just the beginning and once you are sure that you can manage your finances well, you can opt for credit cards with a higher limit.

The Disciplined

You have been there and done it all. You are great at financial planning and almost everything is in perfect shape. You never default on your monthly payments and never spend beyond your means. Reward offers don’t alter your spending pattern and you plan every move before executing.

For the disciplined the best suited card is one with cash back facility and good reward structure. The reward points should accrue irrespective of the type of purchasing done and can be redeemed at one go. Interest rate on your card doesn’t matter much as you always pay on time.

The Carefree

You love spending and believe that spending is the motivation for earning. You plan things beforehand but don’t mind going overboard at times. You cross your spending limit at times so you don’t make full payments on your credit card.

The most important feature which the carefree should look for in a credit card is the interest rate. As you carry forward the balance your interest expense is going to be high. It’s advisable to choose the card which offers the lowest interest rate. You should also make sure that your card does not have any annual maintenance charges attached to it.

The complete mess

You don’t understand financial management. Almost every time you do not even pay the minimum amount due on your credit card. All the customer care executives of the bank know you by name and are in constant touch with you. You always end up paying heavy interest and late payment charges.

For the messy it is better to use prepaid cards as it will save a great deal of money which you pay in the form of interest and various charges. This will prevent you from spending beyond your means.

The Credit Fearing

You never wanted a credit card in the first place. According to you being in debt is a crime. You applied for the card just because it made your life easy in some scenarios like booking air tickets and overseas purchases. You only swipe it in some kind of emergency and it goes unused at times for months.

The best card which will suit your needs is the one with no annual maintenance charge. You never make late payments and you are not a frequent user so interest rate and reward structure of the card doesn’t matter much for you.

Conclusion

There are a wide variety of credit cards available in the market and it’s not possible to research all of them. The better approach in such a scenario is to research your personality and then research the cards available. While you define your personality you get to know the basic traits your card should have. Once you are sure about the traits the list of cards automatically gets shorter. The best approach is to talk to the bank and discuss with the executive regarding your needs and spending behavior. They will definitely guide you with better options as banks are getting more and more cautious about their relationship with the customer. The existing competition in the market compels them to give better services to their clients. Rather than doing the entire math yourself, put forth some direct questions to them, which will help you make the best decision.

The thrill of acquiring a plastic card that accords unlimited financial freedom is a joy most people savor. But along with the freedom comes a huge responsibility of managing and handling the card smartly. The chances of misuse and abuse are quite high in case of a credit card especially for people who are beginners in managing credit. Especially teenagers who get their first credit card from parents are more likely to fall prey to the lure of free money which often leads to a debt trap through indiscriminate usage. Utilizing the credit card facilities judiciously requires maturity and understanding of its functioning.

Tip 1: Strict Budget

Easy availability of credit is one of the most tempting reasons for over spending when handling a credit card. Such reckless spending could spell disaster for your financial planning. People end up spending more they can actually afford due to the simple reason that they are not being asked to pay upfront. This is surely not a healthy trend. Credit card beginners must make a strict budget for themselves and stick to it at all costs. Registering your mobile number with the credit card company is a smart move which lets you know your actual usage and balance credit limit so that you can track your expenses. Decide on a monthly limit for usage depending on your financial situation and stick to it at all costs.

Tip 2: Credit Limit

When you get a credit card for the first time the company sets a certain credit limit for you depending on your repayment capacity. However in due course of time considering your usage, income increase and payment discipline the companies will tempt you for enhancement of credit limit. Though a higher credit limit will enable you to buy more expensive items it also could land you in serious trouble of debts. It is advisable not to raise credit limits for the first year of usage so that you get a hang of dealing with credit card bills and understand the implications fully. When you decide to raise the credit limit it should be commensurate with increase in your annual salary.

Tip 3: Full Payment

The credit card bill states the amount due, due date and the minimum amount payable. The concept of minimum balance is one of the most misleading features of credit cards. While by paying the minimum balance you will be able to continue with the facilities, it will also mean an additional interest on the balance due. Normally, credit cards charge around 1.5 % to 3% per month on an outstanding amount which is a very high interest rate. Thus if you don’t pay the full amount due in time the bill for the subsequent month is likely to come quite inflated. Rollovers to next month also have a negative impact on your credit ratings subsequently.

Tip 4: Security of Card

There two vital aspects of your credit card which need to be protected. Firstly the cash advance PIN number and secondly the CVV number. One must never disclose these two numbers to anyone in order to ensure security of the card. CVV number is the number printed on the reverse of your card. Other security measures include ensuring that there is no skimming when you give the card to the salesperson behind the counter while buying items. Additionally while using the card over the internet one must use only authorized and trusted sites. The correct procedure is a two step method which is normally followed by most cards (such as Master or Visa), which requires confirmation such as a Verified by Visa password that is messaged to you once. Make sure that your payment gateway asks for this password while transacting on the internet.

Tip 5: Cash Advance

This is one of the facilities of a credit card that should only be used as a last resort and not as a regular feature. The interest rates applicable on cash advances are the highest amounting to about 30% per annum in most cases. This interest is calculated right from the time you take the money out and continues to be compounded till such time the entire amount is cleared. Any slip ups in payment will lead to incurring huge interest payments. While this facility is a standby measure for emergency money its usage must be done with utmost care. The debit card is much more preferable for taking out money when you need as it is your money and entails no interest on the withdrawal.

Credit card is a very convenient tool, which eases money transaction to a great extent. However there are a few common pitfalls associated with it which need to be noticed and avoided at all costs! The first time users are prone to falling prey to such pitfalls and hence need proper guidance and information when they get a credit card.

Credit card companies come up with tempting card offers for investors albeit now more cautiously after the financial markets turmoil, by offering freebies such as life time free credit among other things. Customers already possessing credit cards often find themselves taking up such offers and ending up with multiple credit cards. The moot question here is, should you be content with having one credit card or does it make sense to have multiple credit cards and if so, then how many are enough?

Let’s understand what the benefits and pitfalls of having multiple credit cards could be.

Why would one need more than one credit card?

Credit Limit: If you feel that your credit limit on the single card doesn’t suffice, then you may need more than one card. Nevertheless, remember, if you have a good payment history, credit card companies reward you by enhancing your credit limit which may eliminate the need to go in for one extra card. So make sure you make your credit card payments in time- the benefits are manifold. You credit score will not get adversely impacted, you will not have to pay high interest on your card and credit card companies may enhance your credit limit.

Convenience: At times, merchants do not accept all cards i.e. some may accept only Visa or MasterCard. So if you have only one card, you may be inconvenienced. Also sometimes your card may get rejected for technical and other reasons. So a back up is required.

Fraud Protection: If you use your credit card for online transactions, for fraud protection, you may find it to useful to use only one card for such purpose and restrict the credit limit on it, so that even if your card details are hacked, the extent of damage is limited.

Benefit oriented cards: There are some cards which provide maximum privileges or a good deal if used for a particular purpose such as petrol purchases or air miles. You may want to take advantage of the same and therefore have a card for that purpose only.

What are the drawbacks of having multiple cards?

Credit history: Maintaining a clean credit history is becoming increasingly important with credit bureaus like CIBIL tracking your payment. The probability of missing a payment date is higher if you posses several credit cards as you will have to keep track of the payment date of each of the credit cards. If you renege on your payments, your credit history will be get affected which will adversely impact your credit score and your ability to get loans in the future. Multiple credit cards requires you be to very responsible.

Purchasing Power: Credit cards give you the purchasing power as you do not need money in your account to make a purchase. If you are impulsive, then having multiple cards can prove to be a recipe for disaster as you may spend without thinking of your repayment capability. That will result in postponement of payments and over a period of time, accumulate into a large debt.

Effort: Managing multiple credit cards is an effort because it requires a proper schedule, which you need to figure out and keep a tab on. You need to keep track of the payment dates, the interest free period and the credit limit.

There is no clear cut method that determines how many cards are enough. One may not suffice, because you need a back up just in case your credit card is not getting accepted for whatever reason and also for various other reasons as stated above. But at the same time, having too many cards requires you to act responsibly so that you do not tarnish your credit history and find yourself in a financial mess. So the next time you receive a call for a credit card, ask yourself whether it adds any value for you and whether you will be able to manage it responsibly!

Points to remember:

- It is advisable to make full payment instead of a minimum payment on your credit card bill within the free credit period to avoid interest costs.

- There could be other hidden charges that a credit card company may charge like over the limit fees, transaction fees etc.

Credit card companies lure customers into buying a credit card by offering it free of cost. Customers, many a time believe that if there is not cost involved in buying it, why not have it? So even if I have a card(s) sufficient to take care of my needs, I will opt for another one just because there is not cost associated to it. Here you stand corrected. There are various charges that come with a credit card usage let on alone the annual charges.

Joining and annual fee: In order to entice customers into buying a credit card, many credit card companies offer credit cards free of cost i.e. no joining fees and perhaps exemption from annual fee for a particular period say 1 year after which they will start charging an annual fee. The joining and annual fee could range from Rs. 1,000 – Rs. 3,000 depending on the type of card.

Duplicate Statement fee: While monthly statements are delivered free of cost to the address of the card holder, request for a duplicate statement in the physical form attracts charges which is typically a fixed sum. Some credit card issuers also charge for a duplicate e-statement. E.g. Rs. 100 for a bill over 3 months.

Interest/finance costs: This is a charge well know among credit card users. It is primarily the interest rate levied by the credit card company on the outstanding amount if it is not repaid before the expiry of the due date. This charge can range anywhere between 2.5%- 4% per month which in annualized percentage rate (APR) turns out to be as high as 30% – 48%.

Late payment charges: Every time you make a late payment, over and above the interest rate charged, credit card companies will charge a late payment fee which can either be a fixed sum or a certain percentage of the minimum outstanding balance with a minimum and maximum threshold. It varies from one credit card company to another. E.g. late payment charges could be 30% of the minimum outstanding amount subject to a minimum of Rs. 300 and a maximum of Rs. 600.

Cash withdrawal: Cash withdrawal is withdrawing money from the bank against your credit limit. Credit card companies charge individuals for cash withdrawal on the credit card. The charges could be a certain percentage of the transaction value or a fixed sum. E.g. 2.5% of the transaction value subject to a minimum of Rs. 250.

Overdraft Limit: Credit card companies charge an overdrawn fee if the customer exceeds his credit limit. This fee is normally a certain percentage of the overdrawn amount subject to minimum and maximum amount. E.g. 5% of the overdrawn limit subject to a minimum of Rs. 300 and a maximum of Rs. 600.

Outstation cheque fee: For the purpose of payment, if you have issued an outstation cheque, the credit card issuer will charge you a fee for it which is a certain percent of the cheque value subject to a minimum amount. E.g. 1% of the cheque amount subject to a minimum of Rs. 100.

Cheque Return/ ECS return charge: In case of a cheque bounce or a failure of ECS, a fixed amount is charged by the credit card issuer.

Foreign currency transactions: In case of transactions outside the country, the same is converted into Indian rupee at a rate suggested by the network infrastructure provider (Visa/Master). Credit card issuers charge a certain percentage of the transaction value subject to a minimum amount. E.g. 3.5% of the transaction subject to a minimum of Rs. 250.

Petrol Transaction and Railway Ticket Purchase Fee: Petrol transaction is levied as a particular percentage of the transaction value subject to a minimum amount. E.g. 2.5% of transaction value subject to a minimum of Rs. 10. In case of railway ticket purchase too, a charge is levied, which is a particular percentage of the transaction value, subject to a minimum amount. E.g. 2.5% of the transaction amount subject to a minimum of Rs. 30.

Service Tax: Expenses on the credit card are subject to service tax of 12.24% which is levied on the total value of the transaction inclusive of fees, interest and other charges.

At the time of issue of credit card, the issuer needs to provide a document containing the terms and conditions governing credit card operations. Before signing the agreement, make sure you go through the fine print with respect to all the possible charges that can be levied so that you understand the carefulness and caution with which you should use the card.

Credit cards provide a great convenience to us when making our transactions. If used in a right way, it gives a maximum convenience and benefit. In contrast, if it is used in a wrong way, they become a financial mystery. The following are some of the smart ways of using a credit card.

Wide usage

Always try using the credit card as much as possible for even small and regular purchases. This helps you to keep a record of the expenses made during a given period and this helps in budgeting of your expense. Further, try using the credit card at every possible manner. For instance, use credit card to pay all your utility bills, ticket reservations, online purchases and insurance premiums. This way you can make use of the free credit period and earn free credit points to the maximum.

Be cautious of your spending

People tend to always over spend when they use credit card. The reason is that the pain of paying back the money is postponed to a future date. Therefore, always stay conscious while using credit cards.

Pay your credit card bill on time and in full every month

Always try paying the credit card bills well in advance. This minimizes the chances of default from your side and avoids late payment fee. In case of an emergency, try paying at least the minimum amount due.

Don’t use too many cards

Even if you do not use more than one card at a time, the risk exposure of loss or theft is high with credit cards. Therefore have one or to the maximum, two cards. Always remember credit card is a convenience for a single payment option.

Do not borrow on cards

Always remember that credit cards are not an additional source of money. They are only tools to make use of the current funds in an effective way. In case you are really short of money, go for personal loans rather than credit card withdrawals. The rate of interest on a personal loan is also much less than the normal revolving credit facility of the credit cards.

Monitor your credit limit

It is always better to have an optimum credit limit. This decreases the amount of risk exposure. It is better to stick to a self determined credit limit and reject credit limit increase proposals from your card issuer.

Terms and conditions

Always read the terms and conditions before using the credit card. There are always hidden terms and conditions to which customers ignore and end up having. The time you spend in reading the terms and conditions saves a lot of money.

Total usage

If the amount you spend exceeds Rs.2 lakhs per year, you are required to mention the same in your tax return. Therefore, monitor the total usage of your card during each financial year.

Do not pay card surcharge

As a mandatory policy, the merchants are not authorized to demand surcharge on the customer purchases. Therefore, never pay a card surcharge.

Cash backs and reward points

Always make use of the cash back and reward points wherever possible. A word of caution – Ensure that you think of them as an additional bonus and do not get obsessed with them!