Banks increase interest rate to 51% per annum on credit cards

Advisory on Credit Cards

Credit Consumers Association of India advises all credit card holders to exercise utmost caution in the matter of using credit cards.

All credit card issuing companies and banks have raised the interest rate on these cards to 3.15 to 3.5% per month translating to an annual compounded interest rate of 51%.

With credit card holders being asked to pay just 5% of the outstanding amount, the danger of negative amortization (your outstanding amount increasing every month even after paying 5% of the bill amount) has increased.

Illustrative Example

Balance Outstanding	Bill Date	Outstanding	Purchase	Purchase Date	Payment Date	Payment @5%	Interest/Day	Days	Interest for the Period
0	10/07/2008	0	2000	15/07/2008	20/07/2008	100.00	0.00	0.00
1900.00	10/08/2008	1955.42	0		20/08/2008	97.77	2.22	25.00	55.42
1857.65	10/09/2008	2010.83	0		20/09/2008	100.54	2.17	30.00	65.02
1910.29	10/10/2008	2075.85	0		20/10/2008	103.79	2.23	30.00	66.86
1972.06	10/11/2008	2142.71	0		20/11/2008	107.14	2.30	30.00	69.02

Thus if you made a purchase of 2000/- and then kept on paying the minimum, your outstanding will actually increase instead of decreasing. This happens because the rate of interest is 3.5% whereas the rate of repayment of principal is just 1.5% of the total outstanding.

We request all credit card holders to

1. Seek immediate help in case you are making just the minimum payments.
2. Always make a payment of at least 10% of your outstanding amount.
3. Make payments at least 3 to 4 days before the due date.
4. Keep record of all payments made.
5. Never make payments to collection agents as this involves collection charges.
6. Keep your card usage below the credit limit.
7. Carefully watch your card limit as your bank may suddenly and without notice decrease your credit limit and then charge you for over limit charges.
8. When you go over limit, you do not have any grace period for payments. Make payments to reduce your outstanding below the credit limit and make payments before the bill generation date.
9. Pay off the full amount on your credit card before the due date to enjoy 50 days of free credit.
10. Refrain from using credit card for cash withdrawal as this attracts finance charges from the date of withdrawal and also any subsequent purchase also carries interest charges.

The best way to avoid falling into a debt trap is to completely avoid using a credit card. Use a debit card or cash to make all your purchases. Learn to live within your means and use a credit card only in an emergency!