Power or Peril?

Credit card usage is growing but not the awareness about the rights and obligations of users. How to avoid the pitfalls that lurk in the fine print .

     Print Edition: April 19, 2007

Credit card usage is growing but not the awareness about the rights and obligations of users. How to avoid the pitfalls that lurk in the fine print.

Bhuwan Raja likes to live life to the fullest without cutting any corners. So when the Bangalore-based professional got married in 2000, he went on a shopping binge and ran up a huge bill of Rs 3 lakh. Money was not a problem because he used his credit card to pay for everything. But this honeymoon with consumerism ended abruptly when the credit card bill arrived. Raja could manage to only pay the minimum 5% of the bill. The story was repeated the next month. And the month after that. Net result: By 2003, Raja’s credit card outstanding had ballooned to Rs 5 lakh.

In another part of the country, filmmaker Suniti Ghoshal had barely got over jetlag after a tiring flight from London to Delhi when a call from her bank jolted her out of slumber. The bank had been frantic a l l y trying to reach her to check if the erratic payments on her credit card earlier in the day were actually authorised by her. “I had returned the previous day and the card was with me. However, the bank informed me that the card was swiped at four places to run up a bill of Rs 1.5 lakh in the UK, which I had left over 48 hours earlier,” she recalls. These are just two instances of how plastic can be caustic to your financial health and mental peace. While the profusion of credit and debit cards have opened the sluice gates of spending in India, most plastic users are blissfully unaware of the problems that card usage entail and the dangers that lurk in the fine print. “Often it is a wrong perception and misunderstanding that leads cardholders into a debt trap,” says R.L. Prasad, head of credit cards and personal loans at Standard Chartered Bank.

 ROLLOVER

Rolling over credit card bills is a costly convenience. The card company charges you 2-3% a month, or 24-36% a year on the amount rolled over. Things to Know

• When you rollover you get no free credit period
• Turn large outstandings into personal loans at 15-18% a year
• Avoid rolling over credit unless absolutely necessary

CASH WITHDRAWAL
Cash withdrawals using credit cards are the costliest form of loans.The next month’s bill gets fattened by the interest and the principal.

Things to Know
• You pay interest (2.5-3% a month) from the day of withdrawal till you repay.There is no free credit on cash withdrawals
• Plus there is a charge of Rs 250-300 or 3% of the amount

CASH BACK
Sounds inviting, but it should not make you splurge No cash back if payment is late or user habitually pays minimum amount

Things to Know
• Card has to be swiped on issuer’s machine
• Minimum transaction amount can be up to Rs 2,000
• In some cases, no discount if minimum monthly spend not met

FOREX TRANSACTIONS
Transacting in foreign currency is a double whammy. The exchange rate offered need not be the best. And you are charged a one-time fee.

Things to Know
• Commission of up to 3-3.5% on the value of transaction
• Foreign currency transactions earn you more reward points
• ATM withdrawals abroad fatten your bill significantly

BALANCE TRANSFER
Helps tide over a liquidity crunch by transferring outstanding of one card to another. But don’t make a habit out of this.You still have to pay the balance.

Things to Know
• Balance transferred for a fee of Rs 500
• User may get lower rate of 0.99% for first six months
• Some cards offer interest free window of 60-75 days

According to statistics, most Indians start using a credit card even before they buy a car or a house. As a young earning population armed with credit cards moves faster down the expenseway, it becomes even more important to understand the charges and billing procedures of plastic. In Raja’s case, he was not aware of how the rolling over of the balance works in a credit card account. He just kept paying the minimum amount month after month. And the credit card company kept levying interest month after month.

Here’s an interesting fact: If someone rolls over his credit card bill of Rs 5,000 by paying the minimum 5% every month, it will be six years before he can fully repay the amount with all the interest and fees that accumulate on it. That’s because credit card companies charge 2-3% interest a month on the amount carried forward. That works out to 24-36% per annum and is perhaps the most expensive way of borrowing. Even rapacious moneylenders in the unorganised market charge less. “The interest rate on credit cards is so high because these are essentially unsecured loans,” says Puneet Chaddha, head of card and retail assets, HSBC India.

While rollover charges are not exactly spelt out in fine print, much of the other features can only be read with the help of a magnifying glass. Delhi-based Nandraj Agarwal is a convenience junkie who regularly books air tickets, buys books and sometimes even pays for his utility bills using his credit card online. But all that tech savvy was of little help when it came to unravelling the charges on his credit card. “For a long time I was unaware of the foreign currency surcharge that was levied on my overseas expenses. I came to know of it only after repeated enquiries,” says Agarwal.

Ghoshal’s predicament was different. Someone “duplicated” her card while she was in London and used it to purchase stuff worth Rs 1.5 lakh. “Thankfully, my passport proved I was in Delhi when the card was misused and ICICI Bank reversed the charges,” she says.Don’t expect your card company to play the perfect gentleman. For instance, few people know that using a credit card for ATM withdrawals is a very costly proposition. Besides the hefty interest charge on the amount withdrawn, there is a cash withdrawal fee of about Rs 250-300 or 3% of the amount withdrawn, whichever is higher. That means if someone withdraws Rs 10,000 and repays the sum after 15 days, he would have to pay back Rs 10,375.

 Are you falling into a debt trap?

If you say yes to even one of these, you are headed for trouble.

YOU PAY the minimum amount of your credit card bill each month

YOU USE a credit card because it lets you roll over credit

YOU OFTEN borrow to pay your credit card bills

YOU HAVE taken, or plan to take, a cash advance on your credit card

YOU GET repeated calls from credit card collectors for late or no payment
The fuel surcharge is another grey area that very few cardholders have cracked. Though co-branded cards state it explicitly, users of other cards must remember to fill their tanks only at designated stations. Otherwise they may be slapped with a 2.5% fuel surcharge. Worse, some cards even levy a Rs 250 fee for such a facility. That means, you could end up paying Rs 1,275 for petrol worth Rs 1,000.

Of course, credit card companies love customers who roll over payments, make cash withdrawals or are blind to the hidden charges being levied on them. That is where the money is. To entice such spenders, companies dole out incentives like hiked credit limits. The small print on such incentives clearly says sucker!

Instead, you must learn to be a proactive and smart card user. Though regulations are now being put in place to protect card users (see User’s Rights, page 46) there are still many issues that remain unclear—most importantly the various costs associated with cards.

Meanwhile, Raja has cleared all his debts and is happily working in the US. “I had used my credit card only because of the convenience it offered. I had no idea the bill would rise by so much,” he says. He still uses his credit card, but is more prudent while using it. And he definitely settles the entire outstanding amount by the due date.

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