Paresh was very fond of shopping and leisure since his college days. When he started his job as a software engineer he got a credit card from a bank. He was very happy with the ease of transactions while spending, but become more happier to see a very small amount to pay in the bill. Although he spent more than Rs. 15,000 in that month to buy some clothes and mobile however his bill says only about Rs.750 as “Minimum Amount Due”. Without proper understanding or realising the implications, he kept spending and keep paying the Minimum amount due. Rather he started buying expensive gifts and articles, thus increasing his shopping budget every month. Soon his credit card bill started showing very large amounts which even exceeded his credit limit. Next month his credit card was blocked. Even after settling it became a permanent dent on his CIBIL score. Today even after few years, he is facing issues in getting his home loan sanctioned from other banks as well.
It looks very lucrative as an small amount however may get someone into a large debt trap. Generally, people are not aware of the terms and conditions like how the interest will be charged in Credit Cards . The booklet received with welcome kit about terms are conditions are with very small font and often find the way to dustbin on the same day. Thus paving the way to some unknown risks in all of our lives.
Let us first understand Credit Card Billing Cycle. It is the period for which you are liable to pay the dues in a Credit Card. Assuming your billing cycle from 15th July to 14th Aug and the due date for payment is 5th Sept. In this case, your monthly bill will be generated on the 14th of every month. The monthly bill will contain all your transactions in the Credit Card for the bill period from 15th July to 14th Aug. If you have used the Credit Card for Rs. 10,000 on 16th of July, you have to pay that amount only on the 5th of Sept. You are getting an interest-free credit of around 49 days!
The Credit Card statement will also contain one more option called “Minimum Amount Due.” Normally, the minimum amount due in the Credit Card will be a small fraction of the total amount due, generally around 5% of the total amount due. In the above example, it will be Rs. 500/- (5% of the total amount due of Rs. 10,000). You can either pay the total amount due of Rs. 10,000 on or before the due date of 5th Sept or pay at least Rs. 750/-, which is the minimum amount due in Credit Card.
If you pay at least this amount in the Credit Card, you will not be treated as a defaulter and can use the Credit Card in the future also. If you don’t make even this payment, there will be other charges like late payment fee etc. In case, you pay only the minimum amount due, then the unpaid amount is carried forward to the next billing cycle and so on. This is termed as Revolving Credit. The annual interest rate on Credit Card will be in the range of 36% to 48% depending on the card and issuer. When you are paying only the minimum amount due in Credit Card, you will be charged interest at the above high rate for the remaining balance brought forward in the next month.
Though you make fresh purchases using your Credit Card, but you will not get the interest-free credit anymore. For all the new purchases, the bank will charge interest from the date of purchase. This will continue till you clear the total amount due in the card.
Using revolving credit at such high rates clearly signifies your weak financial position and further negatively affects your CIBIL score. As such, your credibility for taking new loan may take a hit making it difficult to fulfil your dreams in future. Be aware that it is a way from which issuer make lots of money, so never under estimate their seriousness for recovery.
So, what’s the solution…. definitely the foremost : If you are unable to pay the total amount due, it’s better to stop using the Credit Card, till you clear all the total dues. Also you may take loans at comparatively cheaper rates like personal loans, business loans etc and clear the credit card dues.
