You got your credit card bill, looked at the total amount due, or worse, the minimum amount due, stashed it along with other monthly bills and promptly forgot about it. A day before the payment due date, you remembered there was the bill to settle and dropped a cheque at the nearest branch of your bank.
While you were relieved that you remembered well in time, little did you know that dropping the cheque before the due date wasn’t enough—the amount needed to be credited in your credit card account by the due date. The next month, you got slapped with a late payment fee, but in your usual humdrum, you forgot to notice it, concentrating yet again on the minimum due amount, which you settled, perhaps, two days prior to the due date this time. The process continued for a few months, after which you suddenly realized that your spending was not as big as your bills were getting.
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How you pay your credit card bill makes a lot of difference to the final payout. There are three ways of settling a credit card bill. First, pay the total amount due. If you do so, you get to enjoy interest-free credit from the date of purchase to the payment due date. This period ranges between 18 days and 48 days. Second, pay the minimum amount due, which is usually 5% of the outstanding amount. Third, pay any amount more than the minimum amount due and total amount due.
Through the second and third options, the unpaid amount is carried forward to the next billing period and to the next if it’s not settled again. This is called the revolving credit facility. Remember that while you have revolving credit, there will be no interest-free period for any fresh purchases you make. In fact, you start paying interest from the day of the purchase. This happens in any case for any cash withdrawals through your credit card.
With plastic money bringing ease into shopping and spending, use of credit cards has become common. Though most of us see and settle credit card bills every month, few of us really know what each of the simplistic heads really means. We decode the basics in a credit card statement for you.
Graphic by Ahmed Raza Khan/Mint