A line of flexible, short-term borrowing, credit cards assist with tracking expenses, simplify payments and offer valuable benefits from banks and lenders, besides helping build your credit score. However, they are also among the personal finance tools with the highest interest rates and have a slew of additional charges and fees attached.
While it may seem like a straightforward financial decision, opening or closing a credit card impacts your credit score and can significantly affect your overall credit profile. It is thus important to have a good idea of the full costs and risks involved, especially in cases where the annual fees exceed the benefits or payoffs (cash back, vouchers, gifts, convenience, etc.).
What are the charges associated with credit cards?
Credit cards charges and fees include joining fee, annual fee, cash advance fee, overlimit charges, late payment charges, reward redemption fee, foreign currency mark-up fee and transaction charges, lounge access and concierge charges. For first-time users, it is especially important to do adequate research and compare various cards available to check for which is best suited for your needs, especially.
It is advisable to make a choice carefully rather than picking the first name you see. Compare at least three or four cards for factors such as annual fees, interest rates and rewards and perks. You must also take into account the other fine print before making a final choice. Ensure you grasp this information prior to applying for the card.
Credit card charges and fees — Explained
Annual Maintenance Charge: Also known as the annual fee, the amount varies from card to card (between ₹250-50,000), even with the same lender. However, in case of a “free” credit card offer from your bank, you must check the tenure after which the annual fee resumes — is it timebound or lifetime? According to a Paisabazaar report, it is best to confirm the duration of the ‘free’ term from the bank before taking it on.
Joining fee: This is a one-time fee between ₹250-50,000 depending on the type of card, that is charged to the customer the first time that the card is issued to you after application is approved. This is most likely charged when your card is activated or included in your first bill. Similar to the annual maintenance charge, this too may be waived by banks for some customers.
Cash Advance Fee: A part of your credit limit is given to cardholder as a cash limit which can be withdrawn at an ATM using your credit card. However, this is a costly affair with fees as high as 2.5% of the amount withdrawn each transaction. Further, the Paisabazaar report noted that such transactions do not have any interest free tenure and apply from day one.
Over-limit Fee: This facility allows you to spend over your sanctioned credit limit at a hefty fee — ₹500 at minimum and could increase depending on your over-limit amount or could also be a fixed 2-3% charge. However, availability is subject to the type of card you have, so you must clear the facility with your bank / lender first. Paisabazaar suggests consistently maintaining a credit utilisation ratio of less than 30% on your credit cards. Thus, for credit limit of ₹2 lakh it is best to restrict your spending to ₹60,000 per billing cycle to build a good credit score.
Late Payment Charges: This is applied if you miss repayment of your credit card bill outstanding within the deadline. Banks do give you the option to repay a minimum amount and if this is not cleared within the grace period (usually three days), a flat late payment fee is charged on the balance amount.
Annual Percentage Rate (APR): Also known as interest rate, this is charged on any overdue amount over your minimum payment. Credit cards have significantly higher interest rates and can range from 33-42% p.a. (some as high as 50%). So, for a ₹20,000 balance, and payment of ₹5,000, you have APR applied on the ₹15,000 outstanding amount. It is best to avoid this charge at all costs as it can quickly accumulate and overwhelm the card holder.
GST: All credit card transactions are subject to prevailing goods and services tax rates (currently at the rate of 18%) and are levied on the annual fee, interest payments and processing fees on EMIs. It is important to keep this in mind.
Foreign Currency Mark-up Fee: Credit cards that are allowed or use in foreign countries are still subject to extra fees for foreign transactions. This is known as the foreign currency mark-up fee. Charges vary from card to card and among lenders but is usually a percentage of the transaction amount (ranging from 1-3%).
Paisabazaar explains it as follows: For $30 spent on an item using your credit card, the amount is converted into Indian rupees by the bank as per the exchange rate on the date of transaction and then charged accordingly. Assuming the exchange is $1 = ₹60, then the transaction amount will be ₹1,800. Adding mark-up fee of 2%, this adds ₹36 to your bill, and considering 18% GST which is ₹6.48, the total value of the transaction will be ₹1,842.48.
Some exceptions do exist for this fee with premium credit cards and travel-focused credit cards.
Transaction charges: This is charged on certain category of payments such as fuel, rent, and utilities. Charges range upwards from 1% on the transaction amount.
Reward redemption fee: Credit cards issuers usually charge a ₹99 fee per redemption request when you use your reward points. The charge may differ across lenders.
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.