Credit cards are part of present-day life because they provide convenience and flexibility to manage funds. They still carry some fees, which can greatly affect your budget if they are not paid on time. Annual fees and fees for transactions made abroad will soon add up, decreasing the value of your points and rights. Once you understand how it works, you can make smarter financial decisions and get more value from your credit card.
A credit card is a financial tool issued by a bank or other financial institution. A cardholder can borrow against a limit preset for the account holder. When the cardholder makes purchases using the card, a payment happens. A statement regarding all these expenses appears monthly, along with the due date. A cardholder can opt to pay the dues fully or the minimum due amount.
Credit card fees are different for each type of issuer and also depends on features offered. The most common fees are:
1. Membership and annual maintenance fees: Many credit cards require a sign-up fee after an application gets approved. An annual usage maintenance charge is also levied. Such fees are subject to change over time with the type of characteristics and rewards the card accumulates. Cards retaining most of the features have higher fees.
2. Interest charges: Failure to pay the full amount of your credit card statement by the specified due date will attract interest for the remaining balance. Users should settle the entire outstanding balance every month to avoid penalties.
3. Late charge fees: If the minimum amount due is not remitted on time, a late payment fee will be charged. Making timely payments prevents users from having to pay extra fees and helps increase the consumer's credit rating.
4. Over-limit fees: Each credit card has a spending limit. If you make purchases that exceed this amount, the provider might charge an over-limit fee. Again, this fee varies depending on the policies of your bank or financial institution.
5. Cash advance fees: Many credit cards also allow cash to be obtained on a 'cash advance' basis, up to an agreed limit. This usually involves a fee, perhaps around 2.5% of the amount taken, and will accumulate interest from the date of the transaction.
6. Foreign transaction fees: You will probably incur a foreign transaction fee every time you make an international purchase online or when abroad. This fee is the cost of changing the money you spend in their country to your local currency.
7. Card replacement fees: Your credit card may get lost, stolen, or even destroyed, but you can always claim a new one from the bank that issued the card. This is a normal service and a normal price is charged.
8. Goods and services tax: GST is also charged on credit cards, including annual fee, interest payment, and EMI processing fees. Sometimes, there will be extra charges for fuel or rail tickets.
9. Reward redemption fees: One of the major perks of credit cards is to earn rewards such as cashback, discounts, or points which can be turned in for gift cards or other good things. Some issuers charge a small processing fee when you redeem these points.
If you can figure out how much fees will be charged for these card transactions, it will help you make good choices and avail full benefits. You can save and avoid losses from annual fees, late payment penalties, and other foreign transaction charges. Credit cards bring great convenience and benefits when used discreetly. With proper management and knowledge of the hidden costs, you can get the benefits of credit cards and still maintain your financial health. Defaulting on credit card payments would drag your Credit Information Bureau (India) Limited (Cibil) score, which means a higher probability that your loan application will be rejected in future. Even if loans are approved, you will be charged higher interest rates. Also, your credit limits will be lower.
