One news item which caught my eye is that ‘CREDIT CARD DUES in India have crossed over Rs 2 lakh Cr for the first time in April 2023’. As per the Reserve Bank of India, there is an increase of 29.7% over April 2022. As per the experts, the increase in credit card dues is not just rising indebtedness but is a reflection of their increased use for payments and inflation. The figure says in April 2023, the total value for which credit cards were swiped or used online was just over Rs 1.3 lakh Cr, which means a balance of Rs 70,000 lakh Cr was for interest and penalty. Generally, an increase in credit card transactions is seen as a measure of consumer confidence, but growth in dues can also be because of inflation, as people pay more for the same items.
Credit card outstanding is the third biggest segment in personal loans, see the % share in overall bank credit:
- Housing loan stands @ 14.1%
- Vehicle loans stand @ 3.7%
- Credit card outstanding @ 1.4%
Before April 2023, the share of credit cards outstanding was high@ at 1.2% just before the global financial recession in 2008.
What Are Credit Card Dues
The credit card minimum amount due is a small portion of the total outstanding bill that you must pay to your credit card issuer to keep your account in good standing. Typically it is 5% of the total outstanding on the bill generation date.
What Credit Card Bill Contain
The charges that are reflected in your credit card bill are as follows:
1 Previous and purchases balances– The biggest portion of your monthly credit card bill will consist of the previous and current purchase balances you have made over the course of the billing cycle. These charges comprise of outstanding bills (the amount left unpaid from your last bill) and your current charges.
2 Cash Advances– Using your credit card to withdraw money from ATM would result in a cash advance charge. Such a transaction would attract interest immediately and does not have a free-lock period. Cash advances attract higher interest rates, and should be avoided unless absolutely necessary.
3 Balance Transfer– A credit card enables you to transfer your debt from one card/multiple cards to other cards. Doing this results in the debt being added or transferred to the other card. If you have moved debt from one card to another card, it will reflect along with interest charges associated with it in your bill.
4 Interest– One of the most important aspects of a credit card bill, the interest due is the charge associated with taking money on credit. In other words, it can be viewed as the charges for what is essentially a loan. The failure to pay your due amount each month will result in the balance amount being carried forward to your next billing cycle, along with interest charges on that amount.
5 Fees– There are different kinds of fees for the credit card usage
- Annual fee- this is a yearly membership fee, and it is levied once a year. Presently most credit card issuers do not charge this fee.
- Transaction fee- It is a charge levied on certain types of transactions, like balance transfers, and cash advances. Using your credit card abroad can also attract fees. The fee percentage charge would depend on your credit card type and the bank.
- Penalty fee- It is levied on actions such as missing a credit card bill payment, using your credit card over your assigned limit, or having payment withdrawn due to insufficient funds.
Paying Credit Card Bill
After receiving the bill, ideally, you should try to pay off the entire outstanding before the due date, to avoid attracting interest charges on your next bill. If not possible, pay at least the minimum amount due. This amount is generally equal to interest plus 1% of the total balance due. In the worst scenario, you could be paying off credit card debt for years, with your interest part only increasing.
Missing Payment
This will result in unpleasant consequences for the amount you will have to pay. Most banks and credit card companies levy late payment charges based on the amount of time taken to clear pending bills.
How Your Bill Payments Are Applied
If your pay any amount that is lower than your total amount due, the bill amount is distributed among the payments that need to be cleared first. If you have any outstanding amounts from your previous bill, the money you have paid will be put towards clearing that debt first. Any payment that has a higher interest rate or high fees associated with them will be cleared first, like a cash advance.
Understanding your credit card bill and its various components will help you make an informed decision regarding your bill payment plan as well as help you understand how the bank charges you for purchases and transactions made on your card. This will, in turn, help you cut down on interest payments and avoid credit card debt.
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THIS IS MY 100th BLOG OF YEAR 2023
Anil Malik
Mumbai, India
26th June 2023.