Understand Your Credit Card Before You Use It

By Author: Haritha
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Though the user gets to purchase an item instantly without any hassle, the interest that a bank charges on a credit card amounts to around 36% to 42% per annum. The interest rates on a credit card are probably the highest, with general loan rates falling in relatively smaller brackets. For a credit card user, this instrument of credit can mainly be seen as amplifying debts, but for banks, credit cards are excellent for their businesses.

How do banks benefit from credit cards?

Forming the core of the credit card business, banks enroll merchant establishments namely hotels, retail shops, agencies or any place where money transactions can be made. The banks are called ‘acquiring banks’ when a merchant is enrolled and the bank processes credit or debit card payments on behalf of the merchants. The bank accepts card payments from credit card issuing associations like Visa, MasterCard, American Express, etc., for the merchant accounts. Merchant accounts have various charges imposed on them like acquirer fees from the banks, interchange fees set up by the associations and other fines from the bank.

Customers ...
... delaying their credit card payments, paying partly or missing to paying the minimum amounts due before the set date add to the profits earned by banks on their credit cards. For any individual delaying their payment, the bank constantly keeps increasing the interest rate on the outstanding balance. The customer ends up paying more than the actual cost of the item purchased. If a customer pays his dues only partly and carries forward his balance, he has to pay interests on all his purchases without availing any free credit period. If the minimum amount payment is also missed before the due date, the bank also increases the interest rates it charges the customer.

What is the best solution?

Customers can avoid paying extra on any kind of credit card purchase, by paying their minimum monthly payments before the due dates and if possible by paying off the entire outstanding amount completely. Credit card users who have a healthy payment pattern generally get free credit periods from the banks before the reimbursement is done to the credit card issuing bank. The free credit period varies from 15 to 40 days, depending on the issuing banks.