The bottom-line is simple: Pay your credit card bills, in full and on time - each time, every time. If you delay settling dues, you may have to pay heavily (penalties, exorbitant interest) and worse, you may fall into a debt trap.

So, should credit cards be avoided completely? No, don't throw out the baby with the bathwater. Whether a credit card is a boon or a bane depends almost entirely on you – the user. Use it wisely and the plastic in your pocket provides a host of goodies - free credit period, freedom from lugging around wads of cash, reward points and special offers. In short, convenience and flexibility. Also, the money stays longer in your bank account and earns you interest. But slip up (not settling dues on time, continually using the minimum payment route, withdrawing cash on the card) and Dr. Jekyll becomes Mr. Hyde - a ruthless money-extractor, capable of burning a big hole in your pocket. Here's why.

Interest rates on outstanding amounts on credit cards are among the highest in the market. The oft-publicised low rates of 2.5-3 per cent per month translate into a whopping 30-36 per cent per annum. Rates could be still higher, depending on the terms and conditions of the card issuer (be sure to read them carefully). Now, these rates are much higher than what is charged on most other types of loans including personal loans (around 15-18 per cent per cent). Add to the concoction late payment fees on payment defaults and the cost avalanche keeps snowballing. Not surprisingly, financial counsellors advise people caught in debt traps to pay off their credit card dues, first and foremost.

Minimum pay, maximum pain

Revolving credit popularly known as the minimum payment facility, available on most credit cards, has proven to be the undoing of many a credit card holder. This feature allows credit card users to pay only a minimum amount of the outstanding balance, and carry forward the rest. While this facility may come handy when the user is faced with a temporary cash crunch, those who fall into the habit of making only the minimum payment run the risk of getting caught in a debt trap. Eventually, they may end up paying a very large sum (towards interest), and the payment period also extends a long time into the future.

By making the minimum payment, the user stays out of the ‘defaulter' books of the bank and escapes late payment fees. But sadly, the good news ends there. On the flipside, he gets charged interest on the purchase amount, that too from the date of the transaction (and not from the due date). Worse, for any new purchases, there is no free credit period, and the user is charged interest from the time of the purchase till settlement of dues.

Let's take an example. Say, the billing cycle on a credit card runs from the March 1 to March 31. During this period, the user spends Rs 10,000 on the card on March 10. The billing date is April 1, the payment becomes due on April 15 and the minimum payment on the card is set at 5 per cent of the amount spent (Rs 500 in this case). The user also makes purchases of Rs 5,000 on April 17. If the user pays the entire due of Rs 10,000 of the March billing cycle by April 15, he enjoys free credit period of upto 36 days (March 10 to April 15) and also enjoys free credit on the purchase of Rs 5,000 in April. On the other hand, if he defaults on the payment (does not even make the minimum payment), the user is categorised a defaulter, levied late payment fees, charged interest from the transaction date (March 10) to the date of settlement, and also loses free credit period for the purchase made in April. Clearly, a worst case scenario.

Even if the user makes the minimum payment, he is charged interest from the transaction date in March, and loses free credit period for the purchase made in April. The only consolation is that he is not on the defaulter books, escapes late payment charges, and the minimum payment made is excluded from interest calculation from the due date. Better than a default but hardly a comfortable scenario.

Clearly, both scenarios of defaulting and making only the minimum payment are heavily pitted against credit card users and can see their interest cost balloon significantly. Users should try to make the most of their card by being disciplined in their spending and payment patterns. They should, as far as possible, strive to pay off the entire outstanding on the card. This will ensure that the credit card provides users with a free lunch, and does not make a lunch out of them. Also, unless previous dues have been settled, fresh purchases on the card should be avoided.

Avoid cash withdrawal

Users should also desist from withdrawing cash on their credit cards, unless there is a dire emergency. Such withdrawals do not enjoy free credit period, and are charged interest immediately from withdrawal to settlement. Also, processing fees are charged on cash withdrawals, which add to the total cost of the user.

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