Taking it from the series of posts exploring the debit and credit cards – you started with what is a debit card and credit card, then moved into exploring how interest is charged in a credit card.
The Plastic Money
Credit Card Interest Calculations – Simplified
In this post, you will read more about the various charges associated with credit cards and debit cards that you should know about.
Fees and charges
There are many fees and charges levied on both the debit and credit cards. While these are popularly called ‘Hidden Charges’, most often they are mentioned in the terms and conditions. The devil in is the detail. It is always prudent to read and make of them.
What are the kinds of charges and fees that are levied?
The bank charges you fees depending on the facilities that you use
For the services that the bank provides you in the form of a credit card, they levy an annual maintenance charge.
When you use your credit card to pay for purchases in currencies other than Indian Rupees, you are charged a commission on the amount.
Banks also charge you for re-generating your PIN, replacing your card etc.
In case of the credit card, it is subject to a few more fees and charges
When you withdraw cash using your credit card, the bank imposes a fee on you called the cash withdrawal fee and this amount withdrawn is not interest-free.
The bank also imposes a late-payment charge if you have not paid the minimum balance due.
However, all these charges are directly levied on you by the bank. There is yet another place a bank earns a commission from.
Merchant Discount Rate
When you swipe your card, before the amount gets paid there is a process that happens.
The machine/online payment gateway connects with your bank to check if it is really you (PIN) and if you have balance to pay for the purchase. To support this system, the bank and the credit card companies charge a commission on every payment – this happens both in the case of debit cards and the credit cards.
Each seller has an agreement that a commission would be charged.
To get a deeper insight on what happen, do take a look at the below video.
It is important to note this because, whenever you see a notice that the debit card and credit card charged extra, this is where it stems from.
Debit Cards
The bank charges a nominal commission that ranges between 0.25% to 1% on the value of the bill to pay for the infrastructural upkeep and transferring the fund to the seller’s account almost instantly. The percentage has been set by the Reserve Bank of India.
Credit Cards
The rates are higher in case of credit cards. In case the buyer doesn’t pay the bill value, or pays late – the bank deals with it. The seller will not be affected if the buyer doesn’t pay. To compensate for this risk, a slightly higher percentage of commission is charged. There are no RBI mandated limits, and often this commission is anywhere between 2% to 2.5%.
Remember: You, as the customer, should not pay this commission if the seller asks you to. The commission must be borne by the seller only. The agreement is between the seller and the credit card companies.
Goods and service tax (tax)
Every fee, charge and interest attracts an 18% GST
Where are they charged?
All the charges, interest and taxes are charged to your existing credit limit. In the case of a debit card, they are debited from your account automatically.
The important question to now ask is, is there any perks of using a credit card?
Let’s explore in the next blog post.
To read the previous posts
The F-Word – FINANCE
The Plastic Money
Credit Card Interest Calculations – Simplified
If you have any questions, please feel free to DM me, or drop them in the comments below. You can also reach me through my mail ID.