Credit Card is the costliest loan! How to avoid paying interest on credit cards?
Credit cards loans can be dangerous, especially for the new users and the ones who fell into its trap. What technically seems like free money is rather a costly affair. If you are planning to get yourself a credit card, or already have one, knowing its usage and its dangers is essential.
When do banks charge Interest Fee on Credit Cards?
One will not receive cash against a credit card loan. Instead, they get credit. One can reuse the card until they pay off the balances. Once the balances are paid, one can use the credit. Credit card issuers charge a certain amount of interest after the grace period (usually 20-25 days). The interest is charged against the amount lent by them. One need not pay the entire amount they owe at once. A minimum amount can be paid to avoid penalty.
A credit card interest in the price one pays for borrowing money. The interest rates for credit cards are usually stated on a yearly basis. This is called the Annual Percentage Rate (APR). The APR is around 36-48% per annum. The interest rate per month is usually around 3-4%. It is considered the costliest loan because of such high-interest rate. Banks calculate the interest on credit card debt on a daily basis. Hence compounding is used to calculate the interest on credit card loan.
Interest-free period, also known as the grace period, is the time between the date of the credit card transaction and the due date of payment for the billing period. It usually varies between 20 to 60 days. During this period the transactions through credit card do not attract any interest, provided you pay the entire outstanding amount.
Banks offer you to roll over your credit card balances to a new card at a discounted rate. Sometimes the interest rate for a fixed period after rollover is 0%. After the expiry of this period, interest will be charged on the outstanding loan amount. This is called balance roll over. Banks do this to keep their business going. And after the rollover, you will be considered as a new customer.
Calculation of Interest on Credit Cards
Let’s see an example of how the interest rate on credit cards is calculated:
|Card Statement Date||15th of every month|
|Retail Purchase of Rs. 10,000||On 20th April’18|
|Interest Free Period||20 days - 5th June 2018|
|Interest charges for 10 days (5th - 15th June 2018)||Rs 98.63|
The cardholder need not pay any interest for the next 20 days. After which he needs to pay the balances in full or minimum payment in the next 20 days to avoid interest charges. After the 5th of June, the interest will be calculated using the below formula. The interest charges on credit cards are paid on monthly basis but are calculated on an average daily balance method.
Interest charges = [(outstanding amount x interest rate per month x 12 months) * number of days] / 365
If the cardholder doesn’t pay the balances till the 15th of June, considering he hasn’t done any transactions yet, the interest to be paid by him at 3% monthly rate is Rs 98.63 for 10 days.
How to avoid the credit card loan?
Credit cards make spending effortless. One just has to swipe the card and all their wants are satisfied. But such effortless spending will create a vicious debt trap. Credit cards are smart, but one can be smart in the way they use them.
Use Credit Card EMI
You can convert your credit card payments into monthly EMIs for credit cards. EMIs on credit cards are much like a personal loan or home loan. You pay the principal plus the interest every month over a period of time to clear your debt. The EMIs come with lower interest than the non-EMI option on credit cards. Your monthly interest rate on credit card loans is around 3%-4%, the low-interest EMI is available at maybe 2%. Every month you pay your balances and till you bring this balance to zero, you cannot shop to the original card limit.
Plan your Expenses
Create a monthly budget for yourself. Make sure your expenses are within your salary/income limit. Do not, at any cost, exceed your budget. If you are using your credit card to avail any offers then make sure you pay the balances in the same month before the grace period expires. Review your credit card activity each month and keep a track of your expenses done through credit card. Set reminders to pay off your credit card dues. This way you can avoid paying the heavy interests.
Pay the balances in full
Pay the credit card balances in full. Credit card issuers offer a 5% minimum payment to its users. If the minimum is paid then the users will not be charged the late fee. To avoid paying late fees one can pay the 5% amount. But they will still be charged interest on the rest of the balance. It is always better not to roll over credit card dues. Rolling over will also lead to high-interest payments. Interest rates on credit cards are high (36%-48% per annum). Once interest payments start it will be difficult to pay off the balances. And this is where the debt trap begins.
Switch to Debit cards
Debit cards are highly recommended to those who cannot control the urge to overspend using a credit card. By choosing a debit card over a credit card, you will completely avoid falling into a debt trap or pay interest charges. But let’s not forget the offers one can get by using credit cards. For good or bad credit card issuers are giving multiple benefits for its users. Be it a cash back or heavy discounts, credit cards top the list of benefits being given to the users of plastic money. Read on to know when to chose a debit card and when to chose a credit card.
Don’t use too many credit cards
It might seem very tempting to have many credit cards with various benefits and credit limits. But it is recommended not to use too many credit cards. With a lot of credit limit comes unreasonable spending and a high-interest rate. Also, using fewer cards will help you keep a track of all your credit card spending. Too many cards will make it difficult to track your spending and paying off your dues. Limit your usage to 2 cards and not more.
Have a clear understanding about the terms of your credit card
Each credit card issuer has various terms and conditions. Make sure you know and understand each credit card’s policies regarding the interest rates, grace period, credit limit, offers etc.
In case you have an emergency and in dire need of money, opt for a personal loan which is cheaper than credit cards and has a longer repayment period. Personal loans also help you borrow higher amounts than credit cards. Use your credit cards wisely and do not fall into a debt trap.