Credit cards are a popular mode of getting access to short-term credit by paying some fees. The total cost of using a credit card, however, depends on the type of credit card owned, the purpose for which it is used, and the applicable interest rates.
You may be able to use a credit card for free if there are no annual fees involved and you are quite disciplined in the way you manage your expenses and due payments. However, if you fail to pay off the total dues you will have to incur the cost of interest or penalties for late or delayed payments.
Credit Card Interest Rates
Interest rates for credit cards are finance charges that apply only when you have not paid the total outstanding amount for a credit cycle. No interest charges are applicable when you pay all your dues on time. These interest rates vary for different types of credit cards and even from one issuer to issuer.
So, before you apply for a credit card, do check the interest rates charged on the outstanding balances. These rates are not decided based on a user’s credit score and repayment capacity but remain the same for all cardholders. The interest is charged on the outstanding balance daily.
Credit Card Charges
The use of credit cards for different purposes may attract certain charges or fees that vary from one bank to another. These charges may even vary between two different types of credit cards from the same issuer.
Some common charges associated with credit cards are:
- Annual Charges: This is the cost of using the credit card and is paid on an annual basis. What you can do is compare credit cards and choose the one with no annual fee.
- Charges for withdrawing cash from an ATM by using a credit card: You can again avoid this charge by comparing different cards and choosing the one which does not charge you anything for cash withdrawals or the charges are minimal. Such charges are generally billed by the bank in the next credit card statement.
- Charges for cash advances: Some credit cards carry a finance charge on the cash advance and the same is applicable from the date of the withdrawal until the amount is paid back.
- Penalties or late charges for the due amount: When you are making your due payments at a date after the due date, you may have to pay some penalty.
- Charges related to currency conversion: Credit cards when used in a foreign country carry an additional currency conversion fee.
The total charges incurred by you while using your credit card can be managed by modifying your expenses. While certain charges or fees like annual fees can be done away with, interest charges on outstanding amounts can be avoided by making the due payments on time. Also, when you are applying for a credit card, read the details about various charges that are applicable on cash advances, balance transfers and foreign currency transactions.
You also need to compare the cost of using a credit card with the benefits or rewards that you get by using it. A card that offers reward points that have no expiry is certainly a good deal. So do check the different types of cards and the charges and interest rates associated with them before you choose one for yourself.