There is a saying “Greed is a well which never dries up”. In a World which only says, buy…buy…buy…you are definitely not at fault. What is the first thing you see when switching on the TV? Buy this soap and your skin will glow. Experience life in 3D with a virtual reality headset. You get to chase sharks. Fly in the sky…Well pretty much anything. Then there are cameras which click hi-definition photos of a ladybird on a leaf. You can even see the spots on the back of the ladybird. The problem….All of this costs money. A lot of money…. You have a credit card. When a credit card is near…all you need to do is swipe. Buy now, pay later, is something you definitely love. “In childhood, a library card takes you to exotic, faraway places; in adulthood a credit card does.
You love shopping. You never forget to take the credit card with you, while shopping at the mall. You buy a smartphone…swipe your credit card. You buy a laptop… swipe your credit card. Your credit card is a constant companion. You love to swipe your credit card. Let’s find out if you understand some of the concepts of a credit card. Whenever you hear of credit cards, a familiar term comes up….The Billing Cycle.
What is this billing cycle? Your credit card has a billing cycle from 3rd June to 2nd July. What does this mean? Billing cycle which is usually 30 days, is the time given to repay the borrowed amount. You swipe your credit card on 5th June and buy a Laptop from a reputed store. This amount appears in the billing cycle from 3rd June to 2nd July. What happens if you swipe your credit card and buy a Smartphone on 1st July? This amount also appears in the billing cycle from 3rd June to 2nd July.
What happens if you cannot pay your bill within the billing cycle? Simple…you are given extra time to pay back the amount, you have borrowed. This is the Grace Period. Grace period is around 25 days. You are not charged any interest, if you pay back the borrowed amount, within the grace period. You can pay back the borrowed amount by 27th July.
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The month of May was so boring. Absolutely no excitement. How did you pass such a boring month? You go on a shopping spree and keep swiping your credit card. Unfortunately all this excess shopping, reflects in your credit card statements. This is when you stumble across a very interesting item in your credit card statement; Minimum Amount Due. This is the minimum amount, you have to pay to the bank or credit card company, by the due date. This is typically 3% of your balance outstanding (amount you have to repay), on the statement date. This saves you from paying any late payment fees. But paying the minimum amount due, does not save you from paying interest on the unpaid amounts on your credit card. The interest on the outstanding dues on your credit card, can be as high as 2% to 3% a month.
It seems the best option at the time. You get away paying only a fraction of your total outstanding amount due. If you have borrowed a lot using your credit card, just pay a fraction of the borrowed amount, which you can easily afford. You do not have to pay late payment fees or any other penalty. Your account remains regular and banks do not report your account to a credit bureau. Your cibil score is not affected. You can avail a loan in the future, if you need one.
Minimum balance is a trick to cheat you out of your hard earned money. It’s a psychological trick…pure and simple. If this option did not exist, you would have been forced to pay back all your credit card dues, within the billing period + grace period. Now you have the option of minimum amount due. You say “Why pay the outstanding dues now”. Let’s postpone it by a month. This is a trick to make you fall into the loan trap. Once you fall into the loan trap, there’s no getting out.
Your credit card has a billing cycle from 3rd June to 2nd July. You have a grace period of 25 days. You can pay back the borrowed amount by 27th July. You are charged an interest rate of 3% a month. You have bought a Smartphone for INR 10,000 using a credit card. You have to pay back this amount of INR 10,000 by 27th July to escape paying interest. You are tempted to pay the minimum amount due, which is INR 300. This is typically 3% of your balance outstanding (amount you have to repay), on the statement date. You have paid the minimum amount due of INR 300 and your outstanding balance is INR 9,700. You now have to pay an interest of 3% on the outstanding amount of INR 9,700.You are charged an interest of INR 291 (3%@ 9700). The interest of INR 291 is then added to the outstanding amount of INR 9700, which becomes INR 9,991. (INR 9700 + INR 291). This amount is well….just INR 9 less than the INR 10,000 you would have to pay (original outstanding amount). You have paid INR 300 as minimum amount due and your outstanding (amount you have to pay back), has reduced by just INR 9…..
Banks have another trick up their sleeve. If there was no minimum amount due, you would have paid back the outstanding dues, within the billing cycle + grace period. Now you have crossed the grace period, as you have made use of the facility called minimum amount due. You no longer get the benefit of grace period. Banks have a third trick up their sleeve. Banks know that you are addicted to your credit card. You just cannot stop spending. You will continue to buy things on credit, with no grace period to support you. Minimum payment increases as you keep swiping. Soon you cannot afford even the minimum payment on your credit card. You are in a loan trap from which you just cannot climb out. Surely “Interests on debts grow without rain”.
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