Oct 18, 2008

Plastic Money: Be Wary of Hidden Traps

MOST of us probably think that we know all there is to know about the credit cards. Unfortunately, the fact is otherwise. We are in the dark as to how these plastic devils actually operate.

Did you know that credit card companies want you to screw up? They want you to go over-limit, pay only minimum dues and pay late. Because, if you do all such acts, you become a profitable customer for them. They prey on people who can’t use credit effectively.

But why do they do all such things? Because, if everyone becomes skillful in using cards, they wouldn’t be free. If everyone becomes wiser and prudent in using credit, then credit card companies would go out of business.

This strategy is nothing but a form of price discrimination/ price targeting under which price insensitive customers pays premium to offset the discount offered to bargain hunters.

Here is a list of few of the traps:

1. Credit limit trap
Do you know your credit card limit? You’d better. In case you exceed the limit, credit card company will approve the transaction but slap you with ‘over-limit’ charges. Therefore, keep a watch on your credit limit and ensure that you never exceed it.

2. Revolving credit trap/Minimum due amount trap
Do you know that interest is charged even if you pay the minimum amount? Will you go for a personal loan which is offered to you at an interest rate of, let’s say, 50 per cent? Did you know that by opting for a revolving credit facility, you are doing the same thing, albeit in a different manner?

From time to time, credit card companies keep on enticing the card holders to spend big amounts and avail revolving credit under which you have to pay as low as 5% every month.

But don’t bite the bait to revolve a balance from month to month. Make sure that your credit card bill is fully paid on. At the very least, always pay more than the minimum because otherwise it will take you years to repay existing debt.

For instance, as per the disclosure written on the back of the ICICI Bank monthly card statement

“If you spend Rs 5,000 and pay exactly the minimum amount due (subject to a minimum amount of Rs 100) every month, it will take you up to 6 years and 6 months to pay back the total amount.”

Further, do you know how the credit card issuer calculates the interest in case you don’t pay the amount in full? Probably, you don’t. In case you don’t pay in full, credit cards start charging you interest each month on an average daily balance from the very first day of purchase. The pertinent point to note is that you also pay interest from the date of transaction till the due date.

And if you still continue to use your card, you will pay interest on all the new purchases made as well as the balance you carried forward from previous month. In other words, by opting for revolving credit facility, you also lose the privilege of free credit period (about 18-50 days) on fresh purchases apart from paying interest on the rollover balance.

Moreover, interest rates charged on credit cards are too high as compared to personal loans. Therefore, credit cards are not a good way to finance your purchases over a long period of time.

Understand that by paying the minimum due amount before due date, you avoid late payment charges but it amounts to indirectly borrowing money at an exorbitant interest rate.

3. ATMs cash withdrawal trap
You must have received an ATM PIN along with your credit card? But, have you ever thought, why do you need it? Better take my advice and never open it. Just throw it in the dustbin.

Never use your credit cards to withdraw cash from ATMs. It is the most expensive way to meet your cash requirement. Similar to revolving credit, it also amounts to indirectly borrowing money at an exorbitant interest rate. Rather, it is even more costly than the revolving credit.

First, you are charged cash advance transaction fees. For example, in case of ICICI Bank credit cards, it is 2.50% on the advanced amount subject to a minimum of Rs 300. Second, interest is charged from the date of a cash advance regardless of whether full dues are paid in time. Third, the rate of interest is too high.

4. Reward points trap
Please note that reward points can be misleading. If you receive, say, Rs 600 voucher against 1000 reward points, isn’t it misleading? Moreover, do you know that if you don’t use your reward points before card expiry date, your points stands forfeited?

Moreover, sometimes, in your excitement to collect more reward points you end up purchasing more stuff than you require.

Needless to say, reward points are only worth if you pay off your card in full every month. Otherwise, interest charges from a single month of spending can wipe out the benefits of any rewards you earn.

5. Cash back trap
To tempt the cardholders to spend more and more, card companies dole out various incentives from time to time. One of them is cash back offers under which you are returned a fixed percentage of your spend.

Unless you are careful and learn to read between the lines of these offers, you can hurt yourselves. Try to read the fine print and you will realize there are so many conditions attached that only one who really benefits from these offers is the card issuing company. In other words, these offers are nothing but another marketing trick.

Related Post:
Credit Cards Cash Back Offers: Always Read the Fine Print

6. Fuel Surcharge trap
Do you buy fuel on your cards? Have you ever tried to tally the charge slip/ bill with the amount charged in your credit card statement? The amount billed to your card statement is generally excess by about 2.5% of the fuel cost. For instance, if you had purchased fuel worth Rs 5,000 on your card, your card statement will show Rs 5,125 i.e., you will be paying Rs 125 extra against your fuel purchase. This is called fuel surcharge.

And, you won’t even notice it unless you’re in the habit of tallying your charge slips with your credit card monthly statements because it is not mentioned separately. It is waived only in case of co-branded credit cards like ICICI-HPCL credit card and that too only if the purchase is made from any outlet of that specific petroleum company having the tie-up with the card company.

So, if you don’t mind paying 2.5% surcharge, it’s ok. Otherwise, either pay in cash or go for a co-branded card having the tie-up with a petroleum distribution company and further make sure that you use petrol pump outlets of that particular company only.

7. Late Fees and other charges Trap
Are you aware that, if you don’t pay at least the minimum amount by due date, you will end up paying the late fees? Even if the payment is late by just one day, you will be charged with a late payment charges in addition to the high interest rates.

Did you know that in case of a cheque bounce (because of a slight error in the cheque) you will be charged cheque return charges in addition to late fees and interest?

It is also quite possible that you miss the payment on account of traveling; non-receipt of statement or any other unforeseen reason.

Therefore, never wait till the last date to clear your monthly dues. Always, make a habit to pay at least one week in advance.

Most cards also charge a foreign currency transaction fee of about three per cent on all foreign currency transactions and this one you will never get to know because the card statement never shows it separately. You simply can’t make it out because when you make the foreign currency transaction, you don’t even know the exchange rate charged by the card company as that is also not specified in your account statement.

Kindly spare a few moments to read the ‘most important terms and conditions’ printed at the back side of your monthly credit card statement because usually most of these traps are found in ‘the fine print’ of a credit card statement.

Before you bite the credit card bait, try to understand the pitfalls so that you can take an informed decision as to what kind of customer you want to be. The choice is yours – to be a proactive and smart card user or a sucker.

Also Read:

1. 10 Common Income Tax Fallacies

2. Mutual Fund Investing: 6 Fallacies Demystified

3. Using Credit Cards - 10 Practical Tips

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