Paying more than you bargained for: Beginners must understand credit card charges before applying for one

Credit cards have undeniably made everyday transactions easier for Indians in recent years. They offer many benefits, including the convenience of cashless transactions, reward points, cash back, and much more. However, using a credit card also comes with certain charges, many of which cardholders may need to be fully aware of. These charges can vary based on the card type, card issuer, and the credit card plan one opts for.

Joining fee: Upon acquiring a credit card, the first charge a user incurs is the joining fee. This is a one-time fee charged at the beginning of the card issuance. Its cost varies depending on the credit card company and the type of card chosen. After this comes the annual fee, a recurring fee charged annually for the services the credit card company provides.

APR fee: Another significant expense is the interest fee known as the Annual Percentage Rate (APR). This fee is applied when the cardholder does not pay the full due amount within the prescribed credit-free period, carrying forward a balance for the next billing cycle. The APR generally varies from 25-45 per cent per annum. This differs from one card issuer to another and can quickly accumulate, making your credit card debt expensive.

Cash advance fees: In addition, charges are applied when withdrawing cash from your credit card, known as cash advance fees. This is a service that should be used sparingly as it has high charges associated with it, and interest begins to accrue immediately from the date of the withdrawal with no interest-free period.

Foreign currency transactions fee: There are also fees associated with foreign currency transactions. A foreign transaction fee is charged when you use your credit card abroad or make an online purchase in a foreign currency. This is generally around 3-5 per cent of the transaction value.

Adhil Shetty, CEO of BankBazaar.com, said, “Credit cards offer a host of additional features and benefits which can be availed at a charge. Some such services include a balance transfer fee, foreign transaction and currency conversion fee, cash advance or withdrawal fee, reward redemption fee, duplicate statement fee, and add-on card fee.”

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Late payment fee: Late payment fees or charges are another set of fees associated with credit cards. A late payment fee is levied if a cardholder fails to pay at least the minimum amount due by the due date. The late payment fee depends on the outstanding amount and can vary drastically from card to card.

Shetty said, “Lenders, in order to mitigate their risk, levy various penalties on irresponsible credit card usage. Some common penalties which are levied on credit cards include a late payment fee, over-limit fee, and card replacement fee. Speaking of penalties, it is also worth noting that interest levied on the outstanding balance in case of a late payment will also attract an 18 per cent GST on a daily basis, which can add to your debt.”

Over-limit fees: Over-limit fees are charged when the credit card holder exceeds his/her credit limit. These fees can be substantial and easily avoided by monitoring credit card usage closely.

BT's take 

While credit cards offer immense convenience and benefits, it is of paramount importance to understand the plethora of charges they are associated with. Knowing these charges can help one use their credit card wisely and avoid any unexpected costs. Reading through all the terms and conditions thoroughly before applying for a credit card is a must. Always remember, credit cards can be a boon to your financial health if managed judiciously but a bane if used recklessly.