FINANCE TIP OF THE DAY
Can you afford your loan?!
Know the quantity of loan you can afford. The banks may sanction loan based on your income but you should look at your monthly expenditure and see if you can afford the maximum that banks offer. As a thumb rule, remember not to let your credit exceed 40% of your income!
Using your credit card overseas? Understand your charges!
You had been saving up for this wonderful trip to Europe and you finally made it! You spoilt yourself silly with more than an eyeful of Europe, some fine dining and went a bit overboard with your shopping as well!
You could afford some of the unplanned expenses thanks to your international credit card! You made sure you did the smart things and noted down the exchange rate too on the day you were making the transactions! You did some calculation of your own and determined with all the conversions that your credit card bill was likely to tally to around Rs. X.
After a jolly good time you arrive at home and begin the daily grind! Soon your credit card bill also arrives! What follows is shock! The bill amount is nowhere the nice round X number you had in mind! It overshot it by nearly 5-6%. In this article we will find out how exactly the amount on your credit card is calculated, so as in future you take this into account to avoid unpleasant surprises!
Why your calculated value and amount on the credit card statement differ?
The two entities involved in the transaction apply additional fees for a foreign credit card transaction resulting in an additional cost of 5 to 6% for the end user. The first entity being the issuing bank like SBI or ICICI and the second, network service providers like VISA and MasterCard.
Why additional fee is applied?
The primary reason additional fee applied is because of intricacies and additional cost involved with currency conversion. Yet another reason is addition of a small margin of profit by the issuing bank and Visa/MasterCard.
What is the type and amount of charges involved?
There are basically three types of charges involved:
1. Foreign Currency Conversion fee – Since you own an Indian credit card, your balance is automatically in Indian Rupees. When you do a transaction overseas, say 50 Euro you will be charged a foreign currency conversion fee as well. Visa and MasterCard automatically charge a 1-2% fee on foreign currency exchange and anything in excess of it is generally a small margin of profit for the bank.
2. Foreign Transaction Charge – Irrespective of the currency, transaction amount, or cash withdrawal, providers (SBI, ICICI, HDFC, BOB, PNB, City Bank etc.) charge a Foreign Transaction charge, which makes up for around 2.5 -3.5% figure off the total transaction amount.
3. Cash Advance Fee- It’s common knowledge that cash advances are expensive even within the country. If you are using your credit card overseas, withdrawing cash will definitely increase the fees. You can be imposed a 1%-4% additional fee every time you carry out an overseas cash withdrawal. You will also be charged the standard cash withdrawal rate for your credit card together with the international cash withdrawal fee.
What about the currency conversion rate on the day of transaction?
The exchange rate that is applied to a transaction is the exchange rate as of the day of settlement, which is the day that VISA or MasterCard determines the settlement amount to be exchanged between the acquirer and the issuer. The settlement date is therefore typically different from the date of the actual transaction. So don’t be surprised if the exchange rate you were using for calculation differs from what has actually been used, as your transaction might have been posted to VISA or MasterCard after one or two days by your merchant. The exchange rate is calculated one day in advance by Visa and MasterCard and is applicable throughout the day for every transaction at the same rate.
Where to find out the information regarding these charges?
To avoid surprises in future it’s advisable to be equipped with the complete knowledge of charges which will be applied on your credit card transaction. The data of Foreign Currency Conversion fee is available on VISA and MasterCard web sites. Please refer it just before you travel as these rates keep on changing.
Data of Foreign Transaction Charges and Cash Advance Fee is available with the issuing bank like SBI, ICICI etc. and you can call their customer care to find out the same before packing your bags. These charges are also dynamic and you might see them fluctuating at regular intervals.
How to choose the best credit card?
If you are a frequent flyer please enquire about the foreign transaction charges and cash withdrawal fees before applying for the card. You might find a difference if 1 to 2% in the offers of credit cards from various banks. Choose the one which charges you the minimum. Nothing much can be done about the currency conversion charges as they are levied by MasterCard and Visa so no point in worrying about that!
It is critical to read the offer document of the credit card provider. You should not treat it as a piece of paper, which just dies a silent death in the offer envelop. Next time around atleast scan your offer document. You will come across a lot of facts which might surprise you. The details of all the charges will be clearly detailed in the offer document. You might not find the exact values as they are pretty dynamic in nature but the rules which govern them are present in the offer document. Mind you, credit card business is one of the most lucrative businesses for the bank and it’s very easy for them to charge a heavy transaction fee.
The importance of paying the full amount cannot be stressed more as banks can charge you a hefty interest rate if you just keep paying the minimum amount due! It’s a practice best avoided. Another big no is cash withdrawal on your credit card, it’s the most expensive form of credit one can avail, so steer clear of it.