The Curse of The Credit Card

Credit card is a potential drain on your earnings. It doesn't seem so, but it is. You tend to spend more when you shop with a credit card. The removal of actual cash passing your hands to another desensitizes you. And all the small purchases add up when the credit card bill comes knocking you door. But there is something more pernicious in credit cards. And that is the minimum payment clause. Why do you think the bank / credit card company allows you to pay only a part of the total. It is not that they love you. It is because it gives them more revenue.

Let's see how it works.

Assume you have made a purchase of Rs. 100. You are allowed to make a minimum payment of 10%. You have to pay for the outstanding amount at 2.5% per month (yeah, it is per month). But there is another twist here. The interest free period disappears when you make a part payment. So you actually pay interest on the Rs. 90 from the day you make a purchase. Suppose you decide to pay off the whole amount in 10 months, you end up paying Rs 11.25 extra. Not much you say? I would loath to pay Rs. 11.25 on every Rs. 100.

But consider this. You not only pay 2.5% on the amount outstanding for the original purchase, you also pay 2.5% on any purchase you make in the payoff duration - even if you pay off the entire amount for the purchase within the billing cycle.

Let us take a simple example. This is your purchase and payment pattern

Month--Payment-----Outstanding-------Purchases------Interest
------------------------------------------------------------
Jan----Rs.100
Feb----Rs.10---------Rs.90------------Rs.1000--------Rs.2.25
Mar----Rs.1090-------Rs 0-------------Rs 0-----------Rs.27.25

Basically, you end up paying for the Rs 1000 for the month of February even though you paid it off without carrying anything forward.
Deadly, isn't it?

By the way, 2.5% per month does not work out to be 30% per annum. It works out to be approximately 34.5%. You might as well take a consumer loan from the bank at 12.5% and pay off the outstanding amount on credit card.