Credit cards can provide you many benefits. You can get discounts and cashbacks on the popular shopping portals. You get discounts at your favourite restaurants. You get discounts while booking flights and hotels. You get rewards point which can be used for future purchases and for exciting gifts or gift coupons.
We have seen the benefits of holding credit cards. Have you considered the costs? There are multiple charges that the issuing bank can levy on your card usage. In this post, I shall focus on the various charges that you might have to pay on your credit cards.
1. Annual Fee
Though most of the cards launched these days do not have an annual fee, a few premium credit cards do charge an annual fee. For a few cards, the fee waiver is only for the first year. You need to pay renewal charges from the second year. For such cards, you need to assess if the card benefits are worth the annual fee. If not, you are better off surrendering such cards. Such cards may have some show-off quotient but may not be kind on your financial health.
For a few credit cards, the annual fee is waived off if your total spend over the card breaches a certain limit during the previous year. For instance, the annual fee for the Citibank Rewards Card is waived off if you spend over Rs 30,000 on the card during the previous year. This amount needs to be spent every year if you want to annual charges for the next year to be waived off. You must keep this in mind. If you have such a card that requires you to spend the minimum amount for annual fee waiver, redistribute your credit card spends so that you breach the threshold limit in such cards. But yes, do not spend just for the sake of meeting the threshold. However, if you are finding it difficult to spend the minimum amount on all such card, it is better to let a few of them go.
2. Late Payment Fee
This fee is charged if you fail to pay even the Minimum Amount Due (MAD) by the payment due date. This fee can be reasonably high. Banks charge Rs 600-800 if you fail to pay the minimum amount due. For more on how Minimum Amount Due is calculated, go through this post.
3. Interest Charges
Banks charge very high rates of interest if you do not pay your dues on time. Interest rates can go as high as 3.5% per month. Along with late payment charges, effective interest can go as high as 50% per annum. This is nothing less than usury. You can avoid late payment fee by settling the Minimum Amount Due. But you are still charged interest till such time you settle the bill in full. If you do not pay your credit card bill in full, you also lose the benefit of interest free credit period. You are charged interest from Day 1 of your purchase. For more on how interest is charged in credit card statement, go through this post.
4. Cash Withdrawal Charges
Do you know you can even withdraw cash from an ATM using your credit card? However, it is better avoided. There is an upfront charge of 2.5% (may vary across cards) of the withdrawal amount and the interest is charged from Day 1. There is no credit-free interest period. You are much better off swiping your credit card rather than withdrawing cash using your credit card to make a purchase. You are advised to avoid cash withdrawals unless there is an emergency.
5. Over-Limit Credit Charge
There is a charge if you breach your credit limit and cash withdrawal limit. So, if your credit limit is Rs 1 lacs but you have spent Rs 1.25 lacs (outstanding) on the card, be prepared to pay some penalty. Typically, a percentage of excess spend is charged as penalty. For Citibank Rewards, you have 2.5% of the excess amount subject to a minimum of Rs 500. Hence, keep track of your spending. If you are swiping your card to earn reward points, make sure you keep the spending under the limit. If you plan to make a big purchase using your credit card, deposit some money in the credit card account upfront.
6. Petrol Transaction Charge
You may have to pay extra if you are swiping your card at a petrol pump. Credit card issuing banks charge up to 2.5% extra on such transactions. There are a few cards that banks issue in association with petroleum retailers. Such cards have this charge (or surcharge) waived off. For instance, Citibank Rewards card waives off the charges at Indian Oil petrol pumps. For other retailers, it is 2.5%.
7. Foreign Currency Transaction Charge
If you are doing a foreign currency transaction using your credit card, say making a payment in dollars on a foreign website or swiping your card while travelling abroad, banks charges a certain mark up over the expense. This is over and above the currency conversion charges.
8. Railway Ticket Booking / Cancellation Surcharge
Banks charge up to 2.5% of the transaction value if you make payments on IRCTC website using your credit card. You are better off making such payments using your net banking account.
9. Cheque / ECS Bounce Charge/ Outstation Cheque Charge
If your payment cheque bounces, be prepared to pay extra. The charges may vary across bank. Citibank Rewards Card charges Rs 500 per bounced cheque. If you make payment using a cheque not payable in the same city, you have to pay a small penalty. However, this is less of a concern these days since most banks issue cheques payable anywhere.
10. Service Tax
Don’t forget you have to pay service tax of 15% (service tax rate as on August 1, 2016) on all the aforesaid charges. So, annual fee of Rs 1,000 quietly becomes Rs 1,150. Late payment fee of Rs 800 becomes Rs 920. Service tax is even charged on the interest payments/charges. Respective banks may have additional charges for statement requests or card replacement or even making cash deposits towards your credit card repayment.
Conclusion
Do not go by what sales agents or executives say. They will promise the world while they are selling the card. Go through the terms and conditions of the card to understand the exact nature and quantum of charges. If you took a credit card because it offered a few movie tickets free every month and felt let down that the offer did not exist (or was virtually non-existent), you will realise what I am saying. Such terms and conditions are available on the website of the credit card issuing bank. Alternatively, a copy of these terms and conditions is also sent to you along with the credit card.
There is nothing wrong in asking. A few banks may waive off the annual charges if you request to. Their decision may also be guided by your spending and payment history. If you have been spending heavily on the specific credit card, then the bank is more likely to accept your request. Please understand that I am not asking you to spend more on your credit card just to get fee waiver.
You must be responsible while swiping your credit card. Your purchase on credit card is equivalent to a loan. Do not borrow more than you can repay. By defaulting on your credit cards, you do not just pay high interest rate but it will also spoil your credit history, which in turn will increase your borrowing cost in the future. Credit Card is a weapon. If you do not know how to use it smartly, it can backfire.