According to ET analysis, credit cards offer convenience but can pose financial risks if not managed wisely. It is important to understand the intricacies of credit card usage and payments to avoid accumulating excessive interest charges. Here are all the details you need to know to avoid falling into a credit card trap:
How credit cards work
You can use credit cards for online and offline shopping, as well as bill payments, as long as the total amount falls within the credit limit set by the issuer. Credit card providers often offer interest-free credit periods, usually lasting from 20 to 50 days. This period normally spans from the date of your purchase to the subsequent payment due date.
Interest rates charged on credit cards and dues
Failure to pay the entire outstanding dues by the due date incurs both penalties and interest. Any new transactions, including outstanding EMIs, accrue a finance charge from the purchase date until all previous dues are cleared.
If a customer misses a payment or pays less than the minimum balance before the due date, the issuer begins collecting interest on the total amount due from the transaction date.
Cash withdrawals from ATMs using a credit card also result in finance charges.
Credit card interest rates differ among lenders and depend on the type of card held.
Minimum payments, grace periods and finance charges
Paying only the minimum amount due, typically 5% of the total, does not exempt the remaining amount from interest charges. Interest continues to accumulate on the outstanding balance and new transactions from the purchase date.
If the outstanding balance is not paid in full, the grace period of interest-free credit is forfeited, and all new transactions start incurring interest.
Impact on credit score
Failure to pay the minimum amount due, as stated in the monthly bill, is considered a default and adversely affects the credit score. It’s important to prioritise timely payments to maintain a positive credit history.
Avoiding the credit card trap
Typically, credit card issuers calculate interest on a daily basis, leading to compounding increases. To navigate this, it’s advisable to exercise caution before each purchase, ensuring that the outstanding bill remains within one’s monthly paying capacity. Additionally, staying mindful of the due date is crucial to managing credit responsibly.