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Sam Ghosh Founder and SEBI Regd. Investment Adviser at Wisejay Private Limited Bangalore, Karnataka
Credit Card Concepts you must know, part 2: Fees and Charges
In Debt Management
1 answer/comment
09:37:20 AM, 5th February, 2019
  • Sam GhoshFounder and SEBI Regd. Investment Adviser at Wisejay Private LimitedBangalore, Karnataka
    Profile

    There are various fees and charges credit card companies charge the credit card holders. Unfortunately, most credit card holders do not even know that those charges exist or are not aware of the true implication of those charges. Even the interest period calculation methods can be different.

    Credit card holder must read the Most Important Terms and Conditions (MITC) Documents with the ‘Schedule of Charges’ thoroughly before signing for the credit card. There are links to MITC document of some credit card companies at the end of this post.


    COMMON FEES AND CHARGES

    1. Joining Fee

    One time fee at the time of availing the credit card. Most companies do not charge this fee.


    2. Annual Fees / Renewal Fee

    As the name suggests, this is the annual fees for holding the credit card membership. This fee is generally applicable for premium credit cards and often waived off if the annual usage of the credit card is above a certain limit.

    Often credit card companies attract customer by giving “free” credit cards. Be careful about what “free” means. Generally, the annual fee for the first year along with the joining fee may be waived off but you may be charged annual fee from the 2nd year.

    3. Cash-Advance Fees

    First of all, what is cash-advance? Cash advance is withdrawing money using credit from ATM instead of paying a merchant with a credit card. Understanding what constitutes cash-advance is immensely important not only because of the cash-advance fee but also because cash-advances do not have any ‘interest-free period’ or ‘grace period’. The credit card company may also charge a higher interest rate of the cash advances.

    Credit card companies charge a flat fee and/or a percentage of the amount withdrawn on the cash-advances.


    4. Late Payment Charge

    This is a flat charge is applicable if the Minimum Amount Due (MAD) is not paid and the amount depends on the statement balance.


    5. Finance Cost / Interest

    This is the interest charge on outstanding amounts. Interest is payable in case of regular transactions (with a merchant) if the total amount due is not paid back by the payment due date. In the case of cash-advance, the interest calculation starts from the transaction date.

    Interest is calculated according to the following formula

    Interest = (Outstanding Amount x Monthly Rate x Interest Period in days x 12) / 365

    Here, the monthly rate depends is generally known. Be careful about how the Interest Period is calculated. An important point to remember that in case of non-payment of dues by the due date, credit card companies may calculate the interest on regular transactions from the transaction date – not from the payment due date or statement date.

    Refer to the MITC of ICICI Bank (link provided below) and refer to the sample calculation of interest for Gold Card on page 6. In this sample calculation, the billing date is the 15th of every month and payment due date for a statement on 15th April 2009 is May 3rd. Notice that for calculation of interest for Rs. 2000 transaction on April 10th the interest period starts from April 10th, not April 15th

    The interest for the Rs. 2000 from transaction date April 10th to the bill payment of Rs. 1500 on May 10th with 3.4% monthly rate (40.8% / 12months)

    = (Rs. 2000 x 3.4% x 30 days x 12) / 365
    = Rs. 67.07


    We have seen an example of an interest period starting from the transaction date. We can now see an example of an interest period starting from the statement date. Refer to the MITC of HDFC Bank, page 2. In the sample calculations, the statement date is the 18th of a month. The interest for the Rs. 15,000 dated 10th of April, is calculated for the period starting 19th April (the day after the statement date) and not the transaction date itself.

    The interest for the Rs. 15,000 dated 10th of April, calculated based on interest period from 19th April (the day after the statement date) to 11th May (the day before the bill payment of Rs. 2000), at a 3.49% monthly rate

    = (Rs. 15,000 x 3.49% x 23 days x 12) /365

    = Rs. 395.85

    Note: The assumption in both cases is that all the previous outstanding balance was paid in full.

    The point is that interest period calculations may vary significantly from one credit card to another. People generally compare the credit cards based on the interest rate but they must also understand how the interest periods may differ. Read the MITC document thoroughly.

    In case there is some amount outstanding, the interest on all new transactions is calculated from the transaction dates.


    6. Over-limit Charge

    For each type of credit card, there is a maximum account balance. The cardholder will be charged Over-Limit Charges if the account balance is higher than the limit (even by Rs. 1). Companies generally charge Rs. 500 or 2.5% of the over-limit amount whichever is higher.


    7. Foreign currency transactions

    The credit card company may charge up to 3.5% markup for the foreign currency transactions. This fee is over and above the currency conversion fee. The currency conversion fee is not charged by the credit card issuer but by the payment procession (Mastercard, VISA etc.) which is in the range of 1%. So, it is advisable not to use a domestic credit card, which does charge foreign currency markup, to make payments using foreign currencies, because they are too expensive.


    8. Payment Processing charges

    There are a number of charges associated with just making payment to the credit card account. Some examples are, Payment Return Charge which is charged if you try to pay the credit card balance with insufficient balance, Cash Processing Fee which is charged in case of payment of credit card bill with cash at a bank or ATM etc.


    9. Other Charges

    Depending on the credit card, there can be a plethora or other fees and charges such as Reward Redemption Charges, Balance Transfer Processing Charges, Fuel Transaction Surcharge, Railway Ticket Purchase Fee, etc. Ask for all the relevant charges before getting the credit card.



    10. Goods and Services Tax (GST)

    All fees, charges and finance costs attract GST.



    MITC Documents
    https://www.icicibank.com/Personal-Banking/cards/pdf/MITC_cc.pdf
    https://www.hdfcbank.com/assets/pdf/cc_common_MITC.pdf

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