Tuesday, June 10, 2008

Cardholders be careful before choosing part-pay bill payment option

Credit cardholder’s be careful in making your bill payments otherwise outstanding amount on card can cost you dear. Therefore cardholders must go through the terms and conditions properly before choosing to part-pay their bills. The card issuers charge the interest not just on the outstanding balance even though cardholder has paid a major chunk of the billed amount, but on all subsequent transaction.

In fact many of the savvy cardholders are aware about this common banking practice of revolving credit but many of them are not aware especially the new ones.

A senior banker explains with an example that how bank levies interest: "Suppose you pay 90% of the billed amount and only 10% is left. The next month (in the following billing cycle), you have to pay interest from the date of the first purchase." So effectively, the consumer loses out on the interest-free credit period. "If you part-pay," an industry expert emphasizes, "not only do you pay interest on the outstanding amount, you also lose interest-free credit facility. Your meter starts as soon as you use your card thereafter." (Incidentally, in case of cash withdrawals, interest charges are levied from the date of transaction).

Banking ombudsman official points out that pre-determined charge are mentioned in the booklet which comes along with the card. "It covers all terms and conditions, but few bother to read it." Thus cardholder cannot challenge these charges, at the banking ombudsman’s level, as the cardholder has accepted the terms by duly signing up for the card.

RBI through 2007 master circular on credit card operations of banks have made it mandatory for the banks to clearly mention the charges. It states: "Card issuers should quote annualized percentage rates (APR) on card products (separately for retail purchase and for cash advance, if different). The method of calculation of APR should be given with a couple of examples for better comprehension. The manner in which the outstanding unpaid amount will be included for calculation of interest should also be specifically shown with prominence in all monthly statements... These aspects may be shown in the welcome kit in addition to being shown in the monthly statement."

The fair practice code of the Indian Banks’ Association, adopted by its member banks, too promises, "We will send a service guide/member booklet giving detailed terms and conditions, interest and charges applicable and other relevant information with respect to usage of your credit card along with your first credit card." For the help of the consumer’s card issuing banks have put the information on their websites.

Recently banks have hiked the interest rates on credit card therefore bankers recommend cardholders to use it only as a short-term credit facility. They advise consumers who might face a repayment crunch to opt for an EMI (equated monthly installment) option—in the first place. They say however, the interest rate too works out to 18-24%, which is quite lower than the interest paid on credit card’s outstanding balance.

But here the consumers have to be careful because the EMI option is normally valid only for a particular transactions and not the outstanding balance. "If you are not able to pay your card bills, take a personal loan," a banker recommends.

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