Credit Cards: Do You Know Your ‘Interest Free Period’ Can Be Revoked?

Most of us who use credit cards regularly are aware of the exorbitant interest costs attached to them. On an average, your credit card issuer will most likely be charging you between 3-3.5 per cent interest per month on your outstanding balance. This, along with the other fees and charges involved, are detailed out in a document titled the MITC or “Most Important Terms & Conditions”.

This document is sent to you as part of your onboarding welcome kit. However, there’s a good chance that you didn’t read the MITC document carefully, as it’s typically shrouded in fine print!

“Most customers are only aware of the joining and annual fees on their card. Other important charges like finance charges, rewards redemption fee and cash advance charges are usually missed - and this often leads to a dispute between customers and the credit card issuer,” observes Sahil Arora, VP & Head of Payments Products, Paisabazaar.com.

Arora goes on to add that “Credit card issuers should ideally send customers a separate email communication on credit card charges to increase awareness”

If you’ve not paid off your credit card dues in full by the “pay by” date, chances are you’ll be confronted with a larger than expected billing amount soon. There’s a reason for that – your ‘interest free period’ gets revoked when you carry forward any outstanding balance from a previous billing cycle into the next billing cycle. This can best be understood with an example.

Let’s say that your credit card cycle runs from 26 to 25 each month, with the payment getting due on the 10th of the subsequent month. Your bill generated on 25 June was Rs 20,000. You continued to use your credit card and bought a mobile phone for Rs 15,000 on 1 July. Unfortunately, you failed to pay your bill amount of Rs 20,000 on 10 July (your due date)

What will happen here is that the purchase of Rs 15,000, that you made in your current billing cycle, will not be considered as “interest free” any longer, due to the fact that you had previous unclear dues pending for payment. You’ll be charged an interest right from the date of purchase until the date that you clear your previous pending payment, as would have been the case with a cash advance.

“If a credit card bill is not paid in full by the due date, every new purchase you make with the card will attract the usual finance charges right from the date of the transaction,” explains Arora.

Extending upon the above example – let’s say that you finally get around to making the overdue payment of Rs 20,000 on 10 August. Not only will you be charged an interest on the overdue amount of Rs 20,000 (something you’re probably aware of) – but you’ll also be charged interest on Rs 15,000 that you spent to buy a new mobile phone on 1 July, right from the date of purchase. Assuming a monthly interest rate of 3.5 per cent for the 40-day period between 1 July and 10 August, this would amount to a hefty sum of Rs 700.

Simply put, credit card purchases become exorbitantly expensive if you have any pending dues. If you’re unable to clear your payment on time for any reason, it’s best to temporarily shut down the usage of that card so as to keep your interest expenses to a bare minimum. Avoid the dangerous cycle of revolving credit, and begin your journey to sustainable wealth creation through savings instead!