Money Matters: Why revolvers get a bad deal when it comes to cards

Revolvers might be cool in movies, but when it comes to money, you certainly don’t want to be a one. A revolver is someone who rolls over credit card balance to next month, by paying only the minimum amount due or slightly more than the minimum amount, but less than the total balance. This is done to ensure he has not defaulted on the card. But if you are smart you would rather be a transactor, one who pays the full outstanding amount on the card, making the most of the interest-free period and not carrying forward the balance.

Of course, you would say, “If I had the money to pay the whole amount, why would I need to use the credit card in the first place?” True, but did you know decision to roll over, especially by paying just the minimum amount, is really one of the dumbest financial mistakes you could ever make?

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How interest-free period works: Before we talk about how part payments affect you, let’s see how interest free period works. For instance, your card’s interest free period starts on the billing date and does not exceed 48 days. Here’s how interest-free period would be calculated then.

For a statement for the period from 11 April to 10 May the payment due date is 28 May. Assuming you have paid your previous month’s dues in full, the grace period would be as follows: For a purchase on 12 April, interest-free grace period is from 12 April to 28 May (48 days) and for a done on 2 May, it is from 2 May to 28 May (27 days). The most important thing to remember is that if you have not paid the previous month’s balance in full before the due date, then there will be no interest-free period.

**When you pay only the minimum amount due:**Let’ say you have a brand new credit card on which you make a Rs 5,000 charge and never use the card ever again. And just stick to paying the minimum amount due, it will take many many years for you to clear the debt completely. What’s more, assuming the minimum due amount every month is 5 percent of the outstanding and the interest charged is 3 percent per month, you will pay more than your original debt just in interest. So, here the total interest you would have paid would be Rs 6627.78 while the total amount you’ve finally paid would be Rs 11,627.68.

This is insane amount of time and money to be paid. And we know you will argue that you would never do such a thing. But you’d be surprised to know that many people roll-over credit and not pay the total outstanding amount, and get locked into a debt trap.

When you make a part payment: May be you are smart enough to not stick to the minimum amount due all the time. May be you pay the minimum amount due only once in a while when you are hard pressed for funds. And, you manage to make at least a big part payment. But don’t be too happy and pat yourself on the back yet because you still pay a lot to the bank.

Let’s assume that you have an outstanding balance of Rs 10,000 for the purchase you made in the billing cycle of March. The statement generated on the 1 Aprilshows a balance of Rs 10000. Now due to cash crunch you make only a part payment of Rs 4000 on the 10 April. And you also use your card for Rs 2,000 on 15April. You make no further payment on your credit card till 1 May. So, here’s how the interest will be charged on your cards. Remember if you pay a 3.1% rate of interest on your card, the daily rate of interest = (3.1%)*12/365 = 0.1019 percent.

On the balance of Rs 10,000 (1 April- 9 April) for 9 days = 10000*0.1019%*9 = Rs 91.71

On the balance of Rs 6,000 (10 April- 14 April) for 5 days would be 6000*0.1019%*5 = Rs 30.57

On the balance of Rs 8,000 (15 April-1 May) for 17 days would be 8000*0.1019%*17 = Rs 138.584

Hence the total interest charged would be Rs 260.864

Now keep in mind for simplicity sake we have not factored in service tax and education cess into the calculation.

Let’s be honest. We use credit card so regularly that it’s impossible for us to calculate and re-check the calculations on our account statement. Hence, we suggest as far as possible get rid off the total amount due on the card. After all, this is the most expensive debt you can ever get into.