Credit cards is not free money, but a loan. You need to pay for what you have bought on credit card. If you don’t pay full or pay minimum balance you will have to pay more as you will be charged interest, huge interest. This article talks about Paying Credit Card Bill, how to read Credit Card Statement, what happens If you don’t pay credit card Bill in full? A credit card is an easy-to-use but complex loan product; understand it well and it will be a friend
Table of Contents
Understanding Credit Card Statement
As we know a credit card is used by the cardholder to pay for something or to withdraw cash on credit. Having a credit card doesn’t mean that one can take unlimited amount. The lender puts a limit on how much you may spend on the card The limit is called credit limit.One needs to remember that one needs to pay back. Each month, credit card issuer sends a bill of statement, which has following details. Image below shows the statement .
Statement of credit card billStatement Date: Period for which you are billed.
Payment due date: This is the date before which your payment (cheque or demand draft) should get credited to the bank to avoid pena. To be more specific, this is the last date by which your payment has to be recorded in your bank’s computer. This is not the date your bill has to be postmarked, or even the date it arrives at the company’s office. So be sure that your cheque/DD reaches the bank well before the due date so that no late payment fee is levied to you.
Total amount due: This is the total bill amount to be paid — the total unpaid accumulated amount outstanding in your account, including interest and any other charges like late payment fees, if any.
Minimum amount due: It is the minimum amount required to be paid to keep your account in a good credit standing. This amount is usually 5 per cent to 20 per cent of your total amount due. If you do not pay the minimum amount due by payment due date, it will be considered as a default and levied a late payment fee.
Tip to remember: Even if you pay the minimum amount due, you will be charged interest on the total amount due (including the minimum amount due that you paid). If you do not want to pay interest you have to pay the entire total amount due before payment due date. Even if you have paid 95 per cent of the total amount due before due date but there is still some small amount pending, you will be charged interest for the full total amount due.
Credit limit: Credit limit is the maximum amount your credit card allows you to borrow, whether as credit against goods purchased or/and cash withdrawn. The card issuing bank can revise credit limit based on your payment track-record. A good payment track record can help you in getting your credit limit increased and vice versa.
Available credit limit: It is the difference between your credit limit and total amount due. If your credit limit is Rs 50,000 and you have spent Rs 1,500, your available credit limit reduces to 48,500.
Cash limit: Cash limit sets the maximum money you can withdraw as cash using your credit card. Your cash limit is a part of your credit limit and so, necessarily has to be lower than your credit limit.
Rewards point summary: This is the record of the rewards points you have earned/redeemed till date. The summary usually gives an account of your opening balance and the points or credits earned or redeemed. You should not confuse reward points with credit limit or balance outstanding. Reward points and the method of redemption vary from one credit card to another.
Transaction details: The transaction details will have the date of transaction, place of transaction (where you spent the money) and the transaction amount. This helps you verify the charges credited to your card.
It is important that you check your credit card transaction details regularly. This is the only way you will come to know if some transaction has been fraudulently credited to your card.
Paying Credit Card Bill
The cardholder is required to pay back the amount that has been borrowed in accordance with the terms and conditions of the credit card agreement. With most types of credit card you can settle the amount owing in full and without interest (on purchases) within a given period of time, called as the grace period . Mostly companies give 20 to 25 days to make their bill payments. One can also pay off a portion of the outstanding amount and carry the remaining balance forward. Infact one can pay minimum amount due(set by the card issuer) and can continue using the card. Sounds too good to be true!! The catch is that if one does not settle the credit card dues fully, one needs to pay extra, the Interest .
Remember about the interest we talked about, how one earns interest by putting money in the bank or borrower has to pay interest on taking loan. Interest-free period for purchases is in effect only if one had paid all the dues.
If you don’t pay credit card Bill in full
This video uses a pitcher and a glass of water demonstrate the effects of minimum credit card payments. This video uses a simple analogy to describe how one is throwing away their money to the credit card companies.
Card issuers give you the option of paying a minimum amount by the due date, which is usually 2.5-20% of the total amount due, along with applicable card fees, overdue minimum payment, and any instalments. Any amount paid that’s less than the total amount will have interest charged on it. Any amount paid less than minimum payment due as on payment due date will also attract late payment charges.
Lets take an example of how much one needs to pay more if one does not pay back all the dues on the credit card. Mr Sharma bought grocery for Rs 100 using a credit card. Let’s say he didn’t pay the entire 100 Rs when the bill comes, so he needs to pay interest. Let’s say credit card issuer charges 1.25% per month. Now if Mr Kumar pays only Rs 20 per month and he doesn’t use credit card for anything else then let’s see how much time and how much extra he needs to pay. Mr Sharma will have to pay Rs 3.93 in six months
As you can see, he will repay Rs 100 in 6 months but he has to repay Rs 3.93 as interest. Rs 3.93 does not seem a big amount but if the amount due is bigger then interest part is also big. If Mr Sharma only paid Rs 10 every month then it will take 11 months to be pay the debt. In that time-period, Rs 7.51 will be paid in interest. For example if the credit is taken for Rs 1000 and only Rs 40 is paid every month then it would take 31 months (almost 2 and half years). Interest of Rs 207 needs to be paid. On the American Express Platinum travel credit card with an interest rate of 3.1% per month, on a transaction of Rs.5,000 if the minimum payment due is paid every month (subject to a minimum payment of Rs.100 every month), it will take up to 75 months for entire outstanding amount to be paid—which will balloon to around Rs.10,000. Calculators Calculator ,Calculator1 can be used to find how much time it would take to repay the credit card debt
Different credit card offers different interest rates so one should try to get the credit card with low rate. If one buys the cycle for Rs 2000 and pay Rs 500 every month then the different amounts one has to pay at interest rate of 8% and 18% is given below
| INTEREST RATE | TIME | TOTAL INTEREST(RS) | TOTAL PRICE(RS) |
|---|---|---|---|
| 8% | 5 months | 34 | 2034 |
| 18% | 5 months | 78 | 2078 |
How much time it takes to pay the credit card debt
If you only pay the minimum amount on your credit cards (about 2 percent of the outstanding balance or 10, whichever is higher), you’ll be paying a long time. Also, you’ll end up paying more because of accumulating interest charges. The table below demonstrates how much faster you can pay off your credit card debt when you increase your minimum payment to 10 percent of the monthly balance. Also, if you make more than the minimum payment, you not only pay off your credit card sooner, but you save money in interest charges.
| Years to Pay Off Credit Card Debt | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Balance | 1000 | 2000 | 3000 | 4000 | 5000 | |||||
| Interest Rate | 2% | 10% | 2% | 10% | 2% | 10% | 2% | 10% | 2% | 10% |
| 10% | 10.4 | 3.0 | 15.3 | 3.6 | 18.3 | 3.9 | 20.3 | 4.2 | 21.8 | 4.3 |
| 11% | 11.0 | 3.0 | 16.3 | 3.6 | 19.4 | 3.9 | 21.6 | 4.2 | 23.3 | 4.4 |
| 12% | 11.7 | 3.0 | 17.4 | 3.6 | 20.8 | 4.0 | 23.2 | 4.3 | 25.0 | 4.4 |
| 13% | 12.4 | 3.0 | 18.7 | 3.7 | 22.3 | 4.0 | 24.9 | 4.3 | 26.9 | 4.5 |
| 14% | 13.3 | 3.1 | 20.2 | 3.7 | 24.3 | 4.0 | 27.1 | 4.3 | 29.3 | 4.5 |
| 15% | 14.3 | 3.1 | 22.0 | 3.7 | 26.5 | 4.1 | 29.7 | 4.3 | 32.2 | 4.5 |
| 16% | 15.6 | 3.1 | 24.3 | 3.8 | 29.3 | 4.1 | 32.9 | 4.3 | 35.7 | 4.6 |
| 17% | 17.3 | 3.1 | 27.1 | 3.8 | 32.9 | 4.2 | 37.0 | 4.4 | 40.2 | 4.6 |
| 18% | 19.3 | 3.2 | 30.9 | 3.8 | 37.6 | 4.2 | 42.4 | 4.4 | 46.1 | 4.7 |
| 19% | 22.3 | 3.2 | 36.1 | 3.8 | 44.2 | 4.2 | * | 4.5 | * | 4.7 |
| 20% | 26.4 | 3.2 | 43.7 | 3.8 | * | 4.3 | * | 4.5 | * | 4.8 |
| 21% | 33.2 | 3.3 | * | 3.9 | * | 4.3 | * | 4.6 | * | 4.8 |
| 22% | 46.1 | 3.3 | * | 3.9 | * | 4.3 | * | 4.6 | * | 4.8 |
| 23% | * | 3.3 | * | 3.9 | * | 4.3 | * | 4.7 | * | 4.8 |
| 24% | * | 3.3 | * | 4.0 | * | 4.4 | * | 4.7 | * | 4.9 |
| 25% | * | 3.3 | * | 4.0 | * | 4.4 | * | 4.8 | * | 4.9 |
| 26% | * | 3.3 | * | 4.1 | * | 4.5 | * | 4.8 | * | 5.0 |
| 27% | * | 3.4 | * | 4.1 | * | 4.5 | * | 4.8 | * | 5.1 |
| 28% | * | 3.4 | * | 4.2 | * | 4.6 | * | 4.8 | * | 5.1 |
1 10 minimum payment in effect if 2% of balance drops below $10. A 1 minimum finance charge in effect if finance charge calculates below 1.
* Not in this lifetime! At these rates, payment exceeds 50 years and in many cases, interest eventually becomes greater than the minimum payment.
Picture (Infographic) below shows how much time it takes to pay the credit card debt
Difficult to pay credit card debt!
Credit card and it’s problems
Don’t buy what you can’t afford
Credit cards are not a source of free money. In fact, using a credit card is like taking a loan. A simple way to avoid card misuse is to charge only those purchases to the card which you know you will be able afford even at the end of the month. A Rs.20,000-mobile phone may look affordable in the first week of a month, but too expensive in the last week.
Understand the card
Credit cards come with a range of interest rates, fees, and reward programmes. Look for one that best suits your circumstances. If you go to a bank’s or a card provider’s website, you will see that the cards are segregated into various sections; mainly travel, shopping, fuel, cash back, premium or luxury. Some of the important details to take note of are: rate of interest, grace period, membership fees, and renewal or annual fees. Use the comparison tool.
Remember the due date
This is a real killer because interest rates on credit cards can be quite high: from 1.99% a month (that’s 23.88% annually) to 3.5% a month (that’s 42% a year) depending on the type of card. What’s more, the interest is charged on the entire outstanding amount; and it’s applied from the date of purchase, and not from the beginning of the month. The formula used to calculate daily interest is: [(outstanding amount x interest rate per month x 12)/365].
Let’s take the Rs.20,000 phone as example. Say, the interest rate is 3.1% per month, purchase date is 20 April, and statement date is 1 May (difference of 12 days). Now, if you miss the due date, the amount of interest you will be charged is: [(20,000 x 3.1% x 12)/365] x 12 = Rs.244.60
On top of this, there will be a late payment or a delinquency fees. For example, HDFC Bank Ltd, charges a flat fee depending the statement balance due—it’s Rs.700 if the bill is above Rs.20,000.
Late payment and even withdrawing cash using your card will mean losing out on the grace period or interest-free period, which usually varies between 20 and 60 days
1. Great article. I also want to get a credit card but cibil score scares me. This is because I have heard that non payment in credit cards due to any reason also lowers down your cibil score. Is that true?
Really helpful article, Thanks.
Admin, can you pls write on Cash Withdrawal using Credit Card? Pros & Cons?
Please highlight on this topic in future article.
NICE ARTICLE TO READ