New Rules Coming into Effect
Starting September 1, 2024, new rules for credit card payments will come into effect. Under these rules, if a customer cannot repay the total outstanding balance, they can now pay just 2% of it. Previously, the minimum required payment was 5% of the total dues. Axis Bank implemented this change in November last year, and other banks like IDFC First Bank are following suit.
Higher Interest Costs for Customers
The big question is whether this change benefits credit card customers. Unfortunately, the answer leans towards no. By lowering the minimum payment, banks might be setting a trap for customers to incur more interest. Banks typically charge 3-4% interest per month on overdue credit card bills, translating to an annual interest rate exceeding 40%. This high interest rate means that the longer the outstanding balance remains, the more interest the customer accumulates.
Example of Increased Interest
Consider a scenario
where a customer's credit card bill is Rs 50,000. Under the old rules, with a
5% minimum payment, the customer needed to pay Rs 2,500, and interest would be
charged on Rs 47,500. With the new rules, the minimum payment drops to Rs
1,000, and interest is charged on Rs 49,000. The slight reduction in the
required minimum payment results in a larger amount being subject to interest
charges, thereby increasing the total interest cost for the customer.
By using these
updated amounts, the concept remains clear and relatable, highlighting the
increased interest costs due to lower minimum payments.
Banks' Gains and Customers' Losses
Banks benefit from this adjustment because it reduces the risk of customer default. By allowing customers to make lower minimum payments, banks ensure that the balance is rolled over, and interest continues to accrue. This additional revenue from interest payments is advantageous for banks. Experts suggest that while the lower minimum payment might seem like a relief, it ultimately benefits banks more than customers.
Digital Lender..! To Use Credit Card or Not to Use It? Understanding the Benefits, Drawbacks, and
Risks. Find Out
Credit cards are a double-edged sword in the digital age. They offer convenience and short-term financial flexibility but can also lead to long-term debt and financial stress if not managed properly.
Understanding Credit Cards
A credit card is essentially a mini-loan provided by the bank with a fixed limit. You can use this limit without any interest for a set period, usually up to 50 days. However, if you fail to pay back the borrowed amount within this period, hefty interest and penalties can apply. The credit card industry has grown significantly, and banks are keen to onboard as many customers as possible due to the profits generated from interest and fees.
The Credit Card Cycle
The credit card cycle involves several parties, including network companies that facilitate transactions across various banks. Initially, debit cards were used to withdraw money from the same bank, but network companies now allow withdrawals from any bank ATM. This widespread accessibility makes credit cards highly appealing.
How Banks Benefit
Banks profit significantly if customers do not repay their borrowed amounts within the stipulated time. They earn from late payment fees, EMI interest, cash withdrawal fees, over-the-limit fees, and annual charges. Therefore, banks aggressively market credit cards to increase their customer base, employing dedicated teams to achieve their targets.
The Illusion of No Cost EMI
Retailers often offer no-cost EMI options for purchases, especially for electronics. However, these options often include hidden processing charges and increased basic costs. What appears as interest-free may actually have built-in costs that customers might overlook.
Avoiding Credit Card Pitfalls
Credit cards can lead to poor spending habits. People tend to buy items they don’t necessarily need, leading to financial strain if they can’t pay off their balance on time. Banks encourage such spending behavior to increase their profits from interest and fees.
Places to Avoid Using Credit Cards
Certain places charge extra fees for credit card use. For instance, petrol pumps levy a 1% service fee plus GST, and IRCTC bookings might include a 1-2% surcharge. Digital wallets like Paytm, Google Pay, and Amazon may charge 2-3% more for money withdrawals. Cash withdrawals and transfers from one credit card to another can also attract high charges.
Choosing the Right Credit Card
With many credit cards available, selecting the right one is crucial. Look for cards with the lowest fees, penalties, and interest rates. Some banks offer no annual fee cards for the first year but start charging from the second year onwards. Understanding these terms can prevent future regrets.
Checking Penalties and Fees
Each credit card has different late payment penalties. Comparing these penalties and interest rates can help you choose a card that minimizes costs. If you frequently shop online, look for cards offering online shopping rewards and benefits.
Extra Time to Pay Bills
According to the Reserve Bank of India’s new rules, credit card bill payment due dates have been extended by three days. This extension helps customers avoid penalties and prevents negative impacts on their credit scores if they miss the initial due date.
In short Summary
While credit cards offer convenience and financial flexibility, they come with risks if not managed properly. The new rule lowering the minimum payment might seem helpful, but it can lead to increased interest costs for customers. Understanding the pros and cons of credit card usage, being aware of extra charges, and choosing the right card are essential steps to avoid falling into debt traps. By making informed decisions, you can benefit from the advantages of credit cards while minimizing the risks.