QSG | Credit Card Nuances

For some Credit Cards are an absolute necessity while for another segment possessing a Super-Premium Credit Card is more about attaining that “Status symbol”. Apart from these two set of cardholders, there is another segment which applies for a Credit Card just because they recently learnt about the benefits or privilege certain Credit Card offered, even though they never needed one.

Quite often it is this third segment of cardholders who gets affected the most (owing to their inability to manage Credit Cards) and have to bear the brunt of Credit Card Issuers’ policies should in case they forget to pay back the amount within the due date!

What is Revolving Credit?

The credit limit is the maximum amount of money a cardholder can charge to that account. As purchases are made, the amount of available credit reduces based on the amount spent. Every time a payment is made, the available credit increases again — according to the amount paid back.

What is Credit Card Interest?

In India, APR starts from 5.88%^{Federal Bank} to as high as 52.86%^{Axis Bank} per annum.

What is Minimum Amount Due?

• The minimum amount due is 5 per cent of the total outstanding amount or ₹100 whichever is higher.
• If any transaction on the credit card has been converted to EMI, that amount is also added to the minimum amount payable.
• Any unpaid balance from the previous billing cycle is also added to the minimum amount.
• Where MAD is not paid before PDD, the next month’s statement includes the payable outstanding along with the interest and late fee to be paid in the next billing cycle.

The Benefits:

• By paying the minimum amount, you can keep your credit active, i.e. you can continue to use the card for the total available credit limit (barring the amount converted to EMI).
• Besides, the bank will not classify your payment as a ‘default’ in the credit record if you pay the minimum amount due. This will ensure that your credit score is protected.
• By paying the minimum amount, the cardholder only avoids paying late fee on the total payable outstanding amount.

The Risks:

• When you pay the minimum amount the rest of the balance gets carried forward and interest is charged on that amount.
• The minimum amount increases for every month that you delay full payment, as the balance amount of one month is added to the minimum amount of the next month
• Credit card interest rate is calculated daily on the outstanding amount, i.e. the unpaid amount.
• The interest is charged from the date of the purchase, and not the end of the billing cycle. Hence, every time you pay only the minimum balance you incur interest charge on that amount from day one and effectively lose out on the benefit of the credit-free period.
• Your available credit limit is reduced to the extent of amount not repaid. Hence, you may not be able to swipe your credit card as per your needs.

Card issuers need to be transparent on the implications of paying only ‘the minimum amount due’. A legend/warning to the effect that "Making only the minimum payment every month would result in the repayment stretching over months/years with consequential compounded interest payment on your outstanding balance" has to be prominently displayed in all the billing statements to caution the cardholders about the pitfalls in paying only the minimum amount due, the RBI said in a statement.

What is a “Credit Free Period” or “Grace Period”?

In case of certain transactions like Cash Advances or Revolving Balances there is NO Credit Free Period. The Credit Card Issuer shall apply interest from the date of transaction. While this applies widely to most of the Credit Cards there are some which allow “Credit Free Period” on cash advances or ATM withdrawals.

When is Interest Charged on a Credit Card?

If only the “Minimum Amount Due MAD” is paid (which is usually about 5 percent of the bill amount) the card holder can repay the outstanding amount over a period of time. But the deferred payment facility attracts a cost, as APR (interest) is levied on the outstanding amount until the full payment of credit card statement is completed.

Ideally the cardholder should pay the complete bill amount by or before the Payment Due Date (end of credit free period) to avoid paying interest charges on the outstanding amount.

Avoid new transactions on credit card, if existing dues have not been paid in full.

How is Interest on Credit Card Outstanding Amount Calculated?

Cardholders are often clueless about how the interest works in the case of Credit Cards apart from the scenario defined above.

Hence, when the Cardholders make PARTIAL payments against the Statement Amount Payable, the Credit Card Issuers calculate the interest on outstanding account balance for the period involved.

Existing outstanding amount is first settled against payments received in a month and
residual balances are settled against current month’s outstanding.

The FORMULA

What are different scenarios for Credit Card Interest calculations?

The illustration below explains various scenarios which may come up and how the Credit Card Issuers calculate the Interest on payable outstanding amount.

Scenario 1 – Total Bill Amount Paid Before Due Date

If you do partial payments of total outstanding credit card dues before payment due date, there is some interest levied. The interest is then charged for all transactions incurred in the current statement, i.e. from the transaction date till the statement date.

Scenario 2 – Partial Amount Paid Before Due Date

Scenario 3 – Partial Amount Paid After Due Date

Delayed or Unpaid credit card amounts negatively impacts the credit scores,
making it harder to obtain meaningful loans at affordable interest rates, when required.

Scenario 4 – Partial Payment After Due Date & Subsequent Transactions

If the “Amount Payable” is paid by the “Payment Due Date”, no interest will be levied.
But, if only Partial amount is paid by the “Payment Due Date”, interest will be charged.

Is GST applied on the Interest Charged on Credit Cards?

For late repayments, the penal interest amount attracts 18% GST.

Cash withdrawals using Credit Cards attracts “Cash Advance Fees” as well as “Interest Charges” from date of withdrawal. It is better to Avoid!

How To Avoid Interest On Credit Card Payable Outstanding Amount?

Financial indebtedness can be reduced to a certain extent by following and practising suggestions below:

1. Control unnecessary expenses. Make essential purchases only, without burning a hole in your pocket.
2. Create budgets to understand available financial resources and amount which can be spent each month.
3. Create a list of identified expenses and prioritise payments made through credit card.
4. Never withdraw cash using credit card. If at all, it becomes essential to withdraw cash, Repay Immediately!
5. Remember “Payment Due Date” or mark them on a calender to avoid paying high credit card interest due to late payments.
6. Set up auto-payment at the bank for credit card dues, if financially convenient.
7. Pay Credit Card Dues (Amount Payable as per Statements) in time and before “Payable Due Date”.
8. AVOID further use of your credit card if full payment has not been made by the “Payment Due Date”. No More Transactions!
9. Opt for a Personal Loan, usually available at much lesser rate of interest, to repay Credit Card Dues.
10. Convert high value transactions to EMIs, interest rate may be higher than Personal Loan but still very low compared to Penal Interest.

Do not fall for Credit Cards offering attractive Reward Points or Air miles or Hotel rewards but at a very high APR.

The Bottom Line

Be clear about how the Card Issuer calculates late payment amount if payments are not made on time.

Credit Card Debt is an AVOIDABLE TRAP! Keep Away From It!

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