Credit card fees piling on? Here's things you can do to reduce or avoid some charges

While credit cards are a flexible option for short-term borrowing and can offer valuable benefits from banks and lenders while simplifying payments for customers, they also come with hefty charges and fees. Healthy financial discipline is needed to make the most of your credit card's benefits and build a solid credit score.

You must keep in mind that credit cards have some of the highest interest rates among the various personal finance tools and have a slew of additional charges and fees attached. So, while it may seem straightforward, your decision to open or close a credit card can significantly impact your overall credit profile.

It is thus important to have a good idea of the full costs and risks involved, especially in cases where the annual fees exceed the benefits or payoffs (cash back, vouchers, gifts, convenience, etc.).

What are the charges associated with credit cards?

Credit cards charges and fees include joining fee, annual fee, cash advance fee, overlimit charges, late payment charges, reward redemption fee, foreign currency mark-up fee and transaction charges, lounge access and concierge charges.

For first-time users, it is especially important to do adequate research and compare various cards available to check for which is best suited for your needs, especially.

It is advisable to make a choice carefully rather than picking the first name you see. Compare at least three or four cards for factors such as annual fees, interest rates and rewards and perks. You must also take into account the other fine print before making a final choice. Ensure you grasp this information prior to applying for the card.

Here's how you can reduce or avoid some credit card charges

• Ensure that you pay your full statement balance within the allotted deadline each month. This will help you avoid interest charges and the late payment fee.

• You can choose to set up automatic payments for the minimum balance payment each month so add another layer of protection ahead of the due date.
• Cash advances using credit cards are a costly affair, with fees as high as 2.5% of the amount withdrawn each transaction. Thus, it is advisable to avoid such transactions except in case of emergency. Cash advance is the part of your credit limit which you are allowed to withdraw at an ATM using credit card.
• Maintain a feasible cash utilisation ratio (CUR) to avoid over-limit fees. These charges can range from fixed ₹500 at minimum and increase depending on your over-limit amount or could also be a fixed 2-3% charge. Paisabazaar suggests consistently maintaining a credit utilisation ratio of less than 30% on your credit cards. Thus, for credit limit of ₹2 lakh it is best to restrict your spending to ₹60,000 per billing cycle to build a good credit score.
• Choose cards with low or no foreign transaction fees for international travel or shopping. While this fee differs from card to card and among lenders, it usually ranges between 1-3% of the transaction amount. Assuming mark-up fee of 2% and that $1 is worth ₹90 at time of transaction, you can end up paying $30.70 ( ₹2,763.72) for an item costing $30 ( ₹2,700) due to mark-up, GST and taxes.
• Consider converting large purchases into EMIs if you are not able to pay the entire bill.

What factors should you consider before shutting a credit card?

• The annual fees exceed the benefits or payoffs (convenience, ease of use, etc.).

• The card is compromised and has been impacted by a fraud.
• You have security concerns about the credit card or its issuing lender.
• Your usage of the card has affected your score negatively.
• Small, but long-term payments have compounded into a huge debt.

How can I minimise damage to credit history?

• If the annual fee is manageable or nil, keep an older credit card over a newer one.
• Do not close credit cards in quick succession to avoid folding your credit score in one move.
• Check your credit score before and after closing a card in order to take next steps to steady your credit score.
• For an older, less rewards card, try to use it for small purchases occasionally to keep it from becoming inactive.

Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.