A few weeks ago, Rohit started his first job. He was set up with his first salary account and within a couple of days he was offered a free credit card – 10% cashback on purchases, 2 free movie tickets, free insurance for accidents, etc. He was thrilled. Nothing makes you feel like you’ve made it in the world like a wallet full of plastic. And when I met him, he was seriously considering applying for one. Why not, when the credit card companies promise zero joining and zero annual fees?
Like many of us, he is tempted by the promise of a cheap credit card. But is there such a thing? And is a credit card really the answer when you are in an emergency?
There’s No Such Thing as a Free Lunch
Here are 5 hidden credit card costs Rohit, and the rest of us, should consider before applying for a new card:
- Zero annual fees and joining fees, but just not forever: Credit card companies may promise that you are getting a free card, but read the fine print. Many cards do not charge joining and annual fees only for the first year. From the second year onwards, you might have to pay an annual maintenance fee. Other cards might offer lifetime free cards but only if applied using their website. Still others will require that you spend a minimum amount of money to be able to waive your fees in future years.
- Steep interest rates: If Rohit is an impulsive buyer, he’d better be careful, because impulsive and careless spenders are credit card companies’ meal ticket. Rohit will be charged an interest rate between 2% and 4% per month. This might seem small, but really when converted to annualised percentage charge, it is 24% to 48%.
- Watch your credit limit: Credit cards do not spell out the penalties for when you cross your credit limit. The credit card issuer will charge Rohit a percentage of the overdrawn amount. And while the credit card issuer might be willing to extend his credit limit, crossing the credit limit can really hurt Rohit’s credit rating.
- Cash withdrawal charges: Rohit might consider his credit card as an emergency backup source for cash in an emergency, but what his credit card company might not have told him is that he will be charged a transaction fee for it. Rohit might have to pay a 2.5% transaction fee if he uses the cash withdrawal facility. Also, he will have to pay interest on the cash amount he withdraws from day one. He does not receive the benefit of a grace period and these interest rates are never low.
- Other pesky fees: Also, what Rohit and other customers rarely hear about are charges like a processing fee for EMIs, 2.5% fuel surcharge, 14% service tax, charges on foreign transactions, charges for duplicate statements, and fees for using an outstation cheque to pay your credit card bills.
What About Other Freebies Do You Get With A New Credit Card?
Credit cards today offer 10% cashback deals, free insurance, airline miles, reward points you can use to get discounts at various stores, etc. Many of these deals are difficult to redeem and require you to pay close attention to the terms and conditions. In addition, deals like free insurance have hidden fees, limited coverage cannot be renewed once your credit card is canceled.
Be A Wise Consumer
Before applying for a new credit card, consider your actual need. If you find that you do need it, before you apply, read the fine print carefully. Consider all the hidden credit card fees. Make your payments on time, before the due date, to avoid interest payments. And do not use your credit card for large purchases that will take more than a month to pay off – consider applying for personal loans that might be cheaper than credit cards.
Look beyond the clever marketing when you are tempted into applying for a new credit card. There are no freebies in the world of personal finance. Hidden credit card costs lurk everywhere. In fact, if you were to mismanage your credit card usage, you might find yourself worse off, with a damaged credit score and a hidden credit card fees.
In case you are looking for a supercharged credit card, you should try MoneyTap-RBL credit card. It is an app-based means of attaining easy & flexible credit.