 "Limited benefit of no-interest period in credit cards")
Credit card companies, often, dangle offers that seem irresistible. But most probably, they are not as profitable as they seem. The latest one: A no-interest period offer. This offer allows you to carry forward the outstanding amount, for a specific time without paying any interest.
This may seem very attractive, as the bank is allowing free revolving credit. But there are a few factors that customers must keep in mind, or else they could end up losing money. Let us look how this facility can be turned into a benefit.
Unnecessary spending
The option to carry forward the outstanding amount without any interest could lead the card holder to use the card recklessly and spend too much. This should be avoided. Keep your spending under control because the amount has to be paid back at some point of time. Remember that this is not extra cash flow but is in the nature of a loan with a limited interest-free period.
Customers should take a holistic look at their ability to pay and ensure that the total spends do not cross the figure that is reasonable. If not, it can put a burden on their finances and they will find it very difficult to pay off the credit card dues. Hence, at all times, keep a tight check on the credit card spends.
Period of benefit
Keep in mind that the interest-free period is time bound. So, it could be that if your payment is due on April 15, you may get time to clear your dues by payments by May. This means that during this period if you carry forward the payment, there will be no interest charged. But if you don't clear the dues beyond that period, then the interest charges will kick in, with effect from the first payment due date. Assume the payment is due on April 15, with the no-interest period ending on May 15. If you miss the May 15 deadline, you will be charged interest from April 15. This will negate the benefit of no-interest. Banks charge very high interest rates on credit cards, usually between three to four cent per month. On an annual basis this translates into 36-48 per cent per year.
Minimum payment
To avail the interest-free period benefit, often the conditions will require the cardholder to pay the minimum amount. If this amount is not paid, it will be considered as a default. In such a case, the no-interest rule will not apply and the bank will start charging interest rates immediately. The minimum amount may be small, but it is important that it be paid if you want to enjoy the benefits of the no-interest period.
Don't make it a habit
The interest-free period should be treated only as a short-term measure. It should be used only in case you are short of funds in one particular month. If so, then defer payment of your credit card dues. But ensure that you have sufficient funds to pay off the dues in time for your next payment cycle. Don't make it a habit of carrying forward amounts on your credit cards because the interest costs can be very high. Remember that banks would like customers to use the revolving credit facility because that is one way for them to earn interest income. But customers must avoid this temptation.
Usage limit
All credit cards have a usage limit or spend limit, depending on the kind of card. These limits can be as low as Rs 50,000 and could also run into lakhs of rupees for high end cards. This limit is restored after every billing cycle. But if you do not repay the outstanding, then the limit gets used up. Only when you pay the dues will the limit be restored again. So, cardholders have to be careful while deferring the payments. If you have utilised the no-interest offer, and are planning a big-ticket purchase the next month, then repay on time so that the entire usage limit will be available.
When you come across such offers make sure you read the fine print very carefully. The benefit of such a facility is that it offers you an additional credit period, but there is the risk of overspending. This means incurring extra interest rate cost. It may not make much of a difference, in case your spends are not too much. Look at all these factors carefully before deciding whether to take up the offer or not.
This may seem very attractive, as the bank is allowing free revolving credit. But there are a few factors that customers must keep in mind, or else they could end up losing money. Let us look how this facility can be turned into a benefit.
Unnecessary spending
The option to carry forward the outstanding amount without any interest could lead the card holder to use the card recklessly and spend too much. This should be avoided. Keep your spending under control because the amount has to be paid back at some point of time. Remember that this is not extra cash flow but is in the nature of a loan with a limited interest-free period.
Customers should take a holistic look at their ability to pay and ensure that the total spends do not cross the figure that is reasonable. If not, it can put a burden on their finances and they will find it very difficult to pay off the credit card dues. Hence, at all times, keep a tight check on the credit card spends.
Period of benefit
Keep in mind that the interest-free period is time bound. So, it could be that if your payment is due on April 15, you may get time to clear your dues by payments by May. This means that during this period if you carry forward the payment, there will be no interest charged. But if you don't clear the dues beyond that period, then the interest charges will kick in, with effect from the first payment due date. Assume the payment is due on April 15, with the no-interest period ending on May 15. If you miss the May 15 deadline, you will be charged interest from April 15. This will negate the benefit of no-interest. Banks charge very high interest rates on credit cards, usually between three to four cent per month. On an annual basis this translates into 36-48 per cent per year.
Minimum payment
To avail the interest-free period benefit, often the conditions will require the cardholder to pay the minimum amount. If this amount is not paid, it will be considered as a default. In such a case, the no-interest rule will not apply and the bank will start charging interest rates immediately. The minimum amount may be small, but it is important that it be paid if you want to enjoy the benefits of the no-interest period.
Don't make it a habit
The interest-free period should be treated only as a short-term measure. It should be used only in case you are short of funds in one particular month. If so, then defer payment of your credit card dues. But ensure that you have sufficient funds to pay off the dues in time for your next payment cycle. Don't make it a habit of carrying forward amounts on your credit cards because the interest costs can be very high. Remember that banks would like customers to use the revolving credit facility because that is one way for them to earn interest income. But customers must avoid this temptation.
Usage limit
All credit cards have a usage limit or spend limit, depending on the kind of card. These limits can be as low as Rs 50,000 and could also run into lakhs of rupees for high end cards. This limit is restored after every billing cycle. But if you do not repay the outstanding, then the limit gets used up. Only when you pay the dues will the limit be restored again. So, cardholders have to be careful while deferring the payments. If you have utilised the no-interest offer, and are planning a big-ticket purchase the next month, then repay on time so that the entire usage limit will be available.
When you come across such offers make sure you read the fine print very carefully. The benefit of such a facility is that it offers you an additional credit period, but there is the risk of overspending. This means incurring extra interest rate cost. It may not make much of a difference, in case your spends are not too much. Look at all these factors carefully before deciding whether to take up the offer or not.
The author is a certified financial planner