Some people use credit cards to pick their teeth. Some use them for scratching their back. Strange, but true. Credit cards can be put to varied use, right from purchasing the monthly groceries to paying your monthly mobile bill. Johnny is also a master of credit card use. He flashes his card like a weapon at the mere drop of a bill. But today, Johnny is a worried man. He forgot to make the last payment of his credit card dues on time. Now he is scratching his head—thankfully not with his credit card—trying to figure out how much interest the bank has charged. As usual, Jinny turns out to be his only hope.
Johnny: Monthly statements of all credit cards are like a time bomb. If you fail to act in time, the interest charges explode in your face. I really wonder how banks charge interest on credit cards. Do you have any idea?
Jinny: There is nothing really to wonder. If you are using any credit card, you should know how their interest time bomb works. If you know how to defuse it on time then there should not be any problem. The time starts ticking the moment you make any purchase by using your credit card. However, there is a grace period during which the bomb merely keeps on ticking.
During that period the bank charges no interest. If you make the payment of your credit card bill before the due date, the interest bomb will never explode.
But when you use your credit card for withdrawal of cash through ATMs, interest is charged right from the moment you withdraw the cash. In all other purchases, you enjoy the grace period.
The length of the grace period depends upon the point of time of your billing cycle at which you use your credit card. Suppose one such billing cycle is 20 June to 19 July, for which the due date falls on 12 August. Till 12 August, the bank will charge no interest on any purchase made during the 20 June-19 July billing cycle. Suppose you make one purchase on 20 June and another on 19 July, then the purchase made on 20 June remains interest-free for a longer duration than the purchase made on 19 July.
Smart users use their credit card in the first week of their billing cycle to enjoy longer period of interest-free credit.
Johnny: But a longer period of grace sometimes lulls you into forgetting to make the payment of your dues on time. Tell me what happens to such fellows?
Jinny: Well, non-payment of dues on time makes you liable to pay interest on the outstanding dues and also a late payment fee. But things become very complicated.
First, all credit cards charge interest on the daily outstanding balance of a month and hence, if you are paying 3% interest on a monthly basis, then in fact it is as good as paying 36% interest on an annual basis. So you end up paying a very high interest on the outstanding dues.
Second, in case you fail to make payment on the due date, then you have to pay interest from the date of the transaction itself.
Further, you do not get grace period for any new purchases in your subsequent billing cycle.
As a result, you end up paying interest on all purchases made in the next billing cycle. So keeping even a single rupee outstanding may not be a very good idea.
In case the due date is already over, make payment as early as possible. This will ensure that further interest is not charged on your dues. Do not wait for the next billing cycle.
Johnny: What happens if I pay more money than the due amount? Does the bank pay me any interest? Can I withdraw the excess money from an ATM?
Jinny: The bank neither pays you interest nor can you withdraw the excess deposit from an ATM.
Any withdrawal through ATM is treated as credit and you are liable to pay interest.
However, excess payment is adjusted in your next billing cycle for any new purchase.
Johnny: How unfair! Something really needs to be done to protect the customers.
Jinny: Well, spreading awareness is the best way of protection.
The Reserve Bank of India has given guidelines that mandate issuers of credit cards to make full disclosures to their customers. All charges and fees have to be disclosed in a transparent manner. Card issuers should quote annualized percentage rates on the card products and the manner of calculating the same should also be disclosed.
Further, the card-issuing bank has to ensure that wrong bills are not raised on the customer. In case a customer protests about any transaction in the bill, the card issuer should provide explanation and necessary documentary evidence to the customer within a maximum period of 60 days.
Johnny: Good! All these guidelines for bringing transparency will ensure that a customer does not have to deal with a hidden time bomb.
Shailaja and Manoj K. Singh have important day jobs with an important bank. But Jinny and Johnny have plenty of time for your suggestions and ideas for their weekly chat. You can write them at email@example.com
What:Interest charged by banks on credit card dues.
When: Interest is charged in case dues are not paid before the due date. In case of cash withdrawal, interest is charged from the date of transaction.
How much: Interest is charged on the basis of daily outstanding balance of the month.