Missed your credit card payment? here are the fallouts

By: |
Published: June 23, 2016 5:35:44 PM

Credit cards not only reduce the need for carrying cash, they also provide you instant, hassle-free credit at a time of need. It has risks and rewards.

credit card paymentCredit cards not only reduce the need for carrying cash, they also provide you instant, hassle-free credit at a time of need. It has risks and rewards. (Photo: Reuters)

Some time it so happens that you party with your friends and find yourself short on cash while settling bills. But you’re not worried. You have a credit card with a high spending limit.

One of the objectives of the credit card is to curtail the risk of carrying cash. Indeed, cashless transacting is one of the major characteristics of a developed economy.

But always remember that nothing comes for free. Credit cards are a financial instrument with their own risks and rewards. You get honoured by reward points while using a credit card, but you may receive a penalty too, if you forget to settle your monthly bill on time.

Here, we take a look at some simple rules of engagement, getting more out of your reward points, and how to avoid penalties.

Why do you need a credit card?
Credit cards not only reduce the need for carrying cash, they also provide you instant, hassle-free credit at a time of need. It has risks and rewards.

Let’s look at the basic characteristics of credit card. It’s a credit offer to you, with the assumption that you will repay the money to your credit provider within the stipulated time. Your credit provider bears the risk of you becoming a defaulter. Before allotting you a credit card, the credit provider checks your CIBIL report, income status, and credit record to ascertain your repayment capacity. It seeks customers who can use its credit facilities without defaulting.

Don’t Miss Your Payments. Here’s Why

HIGH INTEREST RATES: Many of us use credit cards with attractive credit limits linked to our incomes. We exercise due caution while using our cards. But occasionally we may forget to repay the card provider and unwittingly incur a penalty because of the high interest rates applicable on the dues. Credit card dues will be charged an annual interest rate of anywhere between 23% to 47%, making it possibly the most expensive credit you will acquire.

Are the steep penalties fair? They probably are. Credit companies are in the business of lending you money, while trusting your credit record and hoping you would diligently repay your debts.

BAD HABITS: Don’t even by mistake get into a habit of paying your credit card bills past their due date, even if the penalties seem minor. You may think it’s no big deal to settle bills with penalties of a few hundred rupees because you are earning handsomely and this won’t dent your finances. Wait till you need to buy a car loan or a home loan.

HURTS YOUR CREDIT SCORE: The first verification of your loan application is done through CIBIL, i.e. Credit Information Bureau India Ltd. CIBIL will provide the bank an in-depth analysis of your credit worthiness. Needless to say, any inability to repay your debts and any outstanding balances on credit cards would instantly stand out in your credit report, denting your credit-worthiness in the eyes of the bank. So you may have a high salary and a high spending limit on your card, but a poor credit score would mean your loan application could get rejected.

IT’S YOUR OBLIGATION: Don’t forget that a credit card is a financial product just like a home loan, and its financial liability belongs to the card holder. Till the time the holder clears his liabilities, he gets reward points on the card, and his credit-worthiness remains above board. It is also one’s legal and moral obligation to settle their debts in a timely manner.

How To Be A Disciplined Card User
WHY? First, ask yourself: why do you need a credit card? Take one only if it’s a necessity or if solves any problems that you can’t solve without one. One example could be certain online transactions which require a credit card.

USAGE LIMIT: If you already have a card, set yourself a usage limit. Don’t overuse the credit card, especially if you are not good at making timely payments. It may be a wise idea to lower your credit limit from what’s actually allowed to you by the bank. Excessive usage, i.e. exhausting the spending limit frequently, could show banks that you are credit-hungry, and this could negatively impact your future borrowing capacity.

ALWAYS PAY ON TIME: Always settle bills on time and in full. No making minimum payments. Do not make being late a habit and you’re your credit record. Issue ECS instructions to your bank to settle your card bill automatically, saving you from the task of doing it manually.

Today, India is one of the largest and fastest growing economies in the world. Not everything can be governed by law and penalty. Your own financial discipline will bring you greater leverage and freedom while buying banking products. Just remember: the most valuable asset in the world is your credit-worthiness. Defend it vigorously.

How much does a late payment cost you?

ASSUMPTIONS

Credit card statement date: 5th of every month
Due date: 25th of every month

Interest on due amount: 2.5% per month on average daily balance on normal dues; default interest rate of 3.5% per month on average daily balance if minimum amount dues not paid.

Late payment charge: Rs 300 (if minimum amount dues not paid)

Interest calculation method: (Due amount x monthly interest x 12) x No of days/365

Amount due on April 5: Rs. 10,000.

Calculation of Penalty:

1st Month Dues on May 5 (10000 x 3.5%x12) x30/365 + Late payment charge= 345.205+300= 645.205+10000= Rs 10,645.205

2nd Month Dues on June 5: (10645.205 x 3.5%x12) x31/365 + Late payment charge= 379.72 + 300= 679.72 + 10546.57= Rs 11,226.29

Note: The interest rate and late payment charges are assumed figures

The author is CEO, BankBazaar.com

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