How many times have you been approached by bank representatives trying to sell credit cards? You may have lost the count. But you do know that whenever the card sellers approach you, either through phone or at public places like shopping malls, all they do is sing about the benefits. Ask them about the hidden costs and penalties, you may find them trying to evade such queries. But, why?
No doubt, credit cards come with multiple benefits. While timely payment of dues helps increase your CIBIL score, shopping with the card during festive occasions like Diwali may win you cashback, redeemable reward points and more. You can buy anything you want and pay later. However, there are also some drawbacks and charges not all users are aware of or try to know about them. Take the example of credit card cash advance facility that allows you to withdraw cash from ATMs. Unlike debit cards, you have to pay interest on cash withdrawn with credit cards.
There are at least five types of financial dangers, including three types of penalties you have to pay:
1. Cash advance feature provides instant liquid cash to consumers. However, charges are levied on the withdrawn amount by banks. The charges may range from 2.5% to 3% (minimum Rs 500-Rs 700). For example, a transaction fee of 2.5% or Rs. 300, whichever is higher at domestic ATMs, and 3% or Rs. 300, whichever is higher at international ATMs, is charged by the State Bank of India Card. Similarly, HDFC charges a transaction fee of 2.5% (minimum Rs 500).
2. Customers have to pay an interest on the amount withdrawn using credit cards. The interest rates on the cash advance facility vary from one card to another but are usually high.
3. There is no interest-free period for credit card cash withdrawal. So, the customer has to pay an interest on the amount from the very first day of the withdrawal. Credit card cash withdrawals carry a finance charge from the date of withdrawal until the date of full payment. Ex: For ICICI Credit card, this charge is of 2.95% per month (APR 41.75% per annum).
4. Over-Limit Fee: For all credit card transactions, customers have to pay an over-limit fee if they shop beyond their credit limits. Banks often approve such transactions attempted by the Card Member as a service gesture. Example: In case of ICICI Bank, if the outstanding amount exceeds the credit limit, an over-limit fee of 2.5% of the over-limit amount (subject to a minimum of Rs 300) will be levied. Over-limit status may also happen because of fees or interest charges.
5. If a credit card user makes the deposit after the due date, h/she has to pay late payment charges on the outstanding balance to the bank.