Various Charges Associated With Credit Cards And How To Minimise Them

After receiving a credit card statement, the first thought that comes to our mind is what charges we are going to pay this time. We have anticipated a certain amount due on the card, but the statement tells a different story. There is a huge difference between the amount we have expected and the one shown in the statement, courtesy different charges that we were not even aware of.

Rakesh holds two credit cards, one with a private bank and the other, a foreign bank. Both cards charge a monthly interest of 3.25 per cent. Billing date on the first card is 5th of the month while that on the second is end of the month. Rakesh wants to bring down the overall cost on both the cards. He thinks it can be done by controlling expenses like FTN, LTP, service tax and service charge which altogether are causing a lot of confusion and anxiety to him.

Analysis

Not every cardholder understands the details of entries shown on his/her card, let alone knows to separate them. What is interesting is a lot of these entries are actually the charges levied by the bank itself. Thus it will be foolhardy for a cardholder to concentrate on certain areas to curb expenses, without adequate knowledge of these charges. Chances are that instead of reining expenses, it will generate additional expenses for him. Let's see what happened in Rakesh's case.

Rakesh is incurring a significant expense on his two credit cards. The situation on both the cards might seem to be similar but there are different expenses which need varied approach. Before we take a look at each card expenses separately, we must know that: If there is a balance that has remained unpaid on a credit card since the last month then this will be subject to interest from the first day of the expense. Moreover, all other expenses will also have interest calculated on them.

Credit card 1

Earlier balance: Rs. 8,857
Payment received: Rs. 6,700
Expenses: Rs. 8,815
Payment due: Rs. 10,972

On this card, Rakesh has two additional expenses – a rail ticket and a foreign airline ticket booked in dollars.

FTN fee: Since Rakesh has booked an airline ticket in dollars, he will have to pay the foreign transaction cost fee, known as FTN fee. This is a certain percentage of the original cost and works out to 3.25 per cent in this case. Rakesh needs to check that the correct percentage of such charges has been applied.

Interest charges: An interest cost has arisen because Rakesh has not paid last month's dues in full. Rakesh has an earlier balance of Rs. 8,857 as on June 1. Since he has repaid Rs. 6,700 during the month, he would have to pay interest only for partial period on this Rs 6,700, that is, he would have to pay interest for 20 days from June 1 (day of expense) to June 20 (day of payment).

On the remaining Rs 2,157 interest will be charged from June 1 till the date of the bill generation (In this case July 5). In addition, even other items on the credit card like railways expense and the airline expense will be charged interest even though they are current month's expenses because of the rollover of credit. Interest on each of these items will be for specific days depending upon the date of expense till the date of the generation of the bill.

LTP fee: Since last month's payment was late, a late payment charge indicated as LTP fee is also applicable.

Service tax: It is a tax to be paid on all the charges and interest put together.

Credit card 2

Earlier balance: Rs. 700
Payments received: Rs. 0
Expenses: Rs. 41,933
Payment due: Rs. 42,633

In this case, the outstanding balance that is unpaid is a mere Rs. 700, which has arisen because the payment was made last month on May 25, on an estimated basis, which ended up being short. It is this small amount that takes a heavy toll.

Among the expenses there is a retail store, restaurant, telephone and a health insurance expense made. The health insurance premium carries service tax along with education cess. These cannot be avoided and will have to be paid along with the actual expense. Rakesh has to understand that this figure might look high but is not relevant in controlling cost. It is not paying the full sum last month that leads to the massive Rs. 957 interest burden, which is actually described as service charges by this particular bank. There is a further service tax on this amount and this is collected by the bank.

What's the difference?

In both the cases, outstanding balance has led to the high interest cost; the only difference is that in the first case the balance was large while in the second it was small. Interest cost would have been half had one of the cards been completely paid off.

What should Rakesh do?

The first priority for Rakesh will be to bring down the charges to a minimum level. This will mean focusing on all those expenses that can be controlled. In his case, he cannot avoid the various charges as they are linked to the actual expense made but he can control the interest cost. Thus, he needs to get done with the outstanding balance on at least one card and save himself a good amount in interest.