Credit Card: Cards up your sleeve

Written by Saikat Neogi | Updated: Sep 5 2014, 10:13am hrs
A credit card makes things convenient for the user, enabling him to spend money he doesnt have. But banks are now getting increasingly cautious in

issuing new cards because of rising defaults. They are undertaking more rigorous credit checks and are wary of issuing one to those who already hold quite a few.

Click here for graph

Credit cards are useful when one makes high-value transactions and the bank offers benefits in the form of rewards or cashback. Data from the Reserve Bank of India (RBI) show that during 2013-14, 509 million transactions, valued at R1,53,990 crore, were done through credit cards while 619 million transactions, valued at R95,400 crore, were done through debit cards.

A card user must keep in mind that rolling credit by paying the minimum amount due is not a good idea as banks charge an interest rate ranging between 35% and 42% per annum, depending on ones spend, payback and utilisation patterns.

At the time of deciding on the card, one must analyse the kind of spend that will incur during the year.

If one is a frequent flyer, it makes sense to opt for a co-branded card. Or, if one uses credit card frequently at a particular retail outlet, the retail outlet co-branded card can be helpful as it can fetch additional loyalty points, which can be encashed at a later point.

So, before going in for a card, one should work out a cost-benefit analysis based on ones expenditure patterns and frequency.

Most card issuers give a credit window of 4-5 weeks from the day of spend to the date of the billing cycle. Over that particular period, credit card spend is like an interest-free loan, which can be useful for the borrower as long as he repays the amount before the due date.

The monthly payment should at least cover the minimum amount due, which is usually calculated as 5% of one's balance outstanding, or the sum of all installments, interest/other bank charges and the amount utilised over the credit limit, if any.

In fact, rolling credit is a lot more expensive than even a personal loan, which can be availed at 15-20% per annum. Moreover, some banks charge an annual fee just to keep the card active this is especially true of cards that offer special privileges and loyalty points.

Also, card issuers levy charges such as cash advance fees, late payment charges, ECS/cheque bounce charges and statement request for beyond three months, among others. The credit limit is decided by the issuer while giving the card, and the available credit limit is printed on each monthly statement. The limit can be raised by the bank if the cardholder has a good payment history.

Cashback schemes offered by banks are becoming popular. In a

cashback card, one gets the direct

benefit of cash accruing to ones account, unlike in a rewards card, where one gets reward points later. For example, a cardholder gets a pre-determined percentage of cashback, generally 5% of the expenditure, into one's credit card account. Once cash-back credit reaches R500, the amount is credited to the cardholder's account and can be encashed. However, not all transactions qualify for 5% cashback and it varies from bank to bank.

If one wants to cancel a credit card, due precaution must be taken. First and foremost, one must clear off the dues, such as the outstanding, interest, fees and other charges. Failure to do so can result in the cardholder being considered a defaulter, as a result of which one will never be able to get a fresh card from any bank.

If one cancels the card after the billing date, there might be a residual amount left, which the last statement may not reflect. One must make sure to call up the bank for details of the dues, and clear them all.

Then, one must take a no-dues certificate from the bank, ensuring that it has given in writing that the card is cancelled and there are no dues against it.

If one does not get a letter regarding the closure of the credit card account, the bank may charge renewal fees, which will show as unpaid dues even after one has cancelled the card. This will keep getting carried over to the next month, attracting penalty. This will affect ones credit score in the long run all the records are shared with various credit information companies.

Moreover, if one wants to close multiple credit cards, it is better to do it gradually. Analysts say a long track record helps lenders judge ones creditworthiness better, and keeping old credit cards is helpful in the long run, especially if one wants to take a home or auto loan.