The Trap of Credit Cards

Nowadays, credit card issuing companies across the world are vying with each other for market share. As a result more and more glossy credit card offers are up for grabs. The media is inundated with advertisements from credit card issuer’s offering freebies along with credit cards, life time free cards, zero percent rate of interest for certain months on balance transfers, reward points on usage et al.

This was the rosy dream. What follows is the nightmare where customers struggle when they are subject to a host of deceptive terms and conditions, saddled with enormous interest rates and other fees. Invariably the card is mis-sold rather than sold. To top it all the credit card companies encourage the customers to make minimum payments (revolve credit) thereby throwing the customer in the swamp of heavy interest.

As a customer, one should be wary of the late fee charges, overlimit charges, transaction fees (on cash withdrawals, petrol, ticket bookings ), the interest free period and the minimum dues.

Low minimum monthly payments are asked for by the credit card companies to make repayments convenient. Read the fine print and one finds they are designed to lead cardholders to pay more in finance charges (interest charges). Typically, the minimum dues required to be paid range from 2% to 5% of the total outstanding.

The grace period (interest free period) historically used to be for full one month. Over the years, this period has reduced and now ranges between 20 to 23 days. It is noteworthy to note that the grace period is calculated from the billing date (statement date) and not from the date of purchase. Moreover, for cash withdrawals, there is no grace period.

Late fee is levied if the minimum dues are not paid during the grace period. The catch is that even if the minimum dues are paid before the expiry of the grace period, the balance outstanding attracts interest with retrospective effect. In a country like India the rate of interest is approx 3% per month. It tantamounts to approx 45% per annum after adding all other penal charges.

So, it is advisable to shop around before accepting a credit card offer, read the fine print, avoid using the full available credit line, pay off all balances in full in every billing period other wise one will surely eat the bait and fall in a debt trap.