Five reasons: Why should you pay credit card bills on time, always!

Missing timely payment of your credit card bill is one of the biggest financial sins. Regularly missing the due date of your credit card bills comes with massive financial implications that can prove detrimental to your financial health. However, that doesn’t mean you become paranoid against using credit cards. When used smartly with financial discipline, credit cards can be an extremely handy and beneficial financial tool. However, it’s imperative to clear your monthly bill on time always; here’s why:

Late fee: Late fee is levied when you fail to pay the minimum amount due by the bill due date. This fee is added to your next credit card bill and can range anywhere between Rs 100 to Rs 750 per month. However, Reserve Bank of India (RBI) has asked banks and credit card issuers to charge late fee only if you fail to pay your bill within three days of the due date.

Heavy interest on outstanding bill amount: One of the most common and dangerous misconceptions about credit cards is that paying the minimum amount due is sufficient to avoid interest on their outstanding bill amount. However, your entire outstanding credit card bill will attract interest charges, irrespective of the amount that you have paid. For example, assume that your bill was generated on 4th January (payable by 24th January) for Rs 5,000 and your minimum amount payable is Rs 1,000. Now, even if you pay Rs 1,000 by 24th December, you will still be liable to pay interest on the outstanding amount of Rs 4,000. Depending on your card issuer, the annualized interest rate on this outstanding amount can go up to as high as 45% p.a.

Withdrawal of interest-free grace period: Interest-free grace period refers to the maximum period available to clear your credit card dues. The length of this period can range anywhere between 20 to 50 days, depending on the day of the transaction and your bill due date. No interest is charged on your transactions during this period, provided you pay off your entire bill by the due date. Thus, the interest-free grace period represents the biggest advantage of using a credit card as the credit card issuer finances your purchases for free during this period. However, the card issuers may withdraw this period if you fail to make full payments on your due date. Thus, your fresh transactions in the subsequent billing cycle will also attract finance charges.

Reduced credit score: Your credit score depicts your creditworthiness. This score is used by credit card issuers, banks and other financial institutions to evaluate your credit card or loan applications. Card issuers report your late payments or part-payments to credit bureaus, which in turn will include them in your credit report and reduce your credit score. Your reduced credit score can lead to the rejection of fresh loan or credit card application in the future. However, RBI issued a notification in July 2015 wherein it asked card issuers to report late or part payments to credit bureaus only when a customer fails to pay the outstanding amount within 3 days of bill due date.

Decreased credit limit: Frequent late or part payment of your credit card bills may lead your card issuer to reduce your credit limit. This might restrict your future spending capacity. It may also reduce your credit utilization ratio, which in turn may reduce your credit score.

To sum up, late or part payments of credit cards not only affect your financial position adversely, it also reduces your credit score and loan eligibility. As recovering from a poor financial position or credit score can take a significant amount of time, the best solution is to avoid such situations by making full payment by the due date. However, if your financial condition does not allow you to make full payment on time, contact your card issuer and communicate the issue. The card issuer may reschedule the due payment to a mutually agreed date on which you will be able to pay off your dues. Alternatively, you can also convert your purchases into EMI’s at much lower interest rates. If your existing issuer refuses to do so, transfer your entire outstanding balance to another card issuer.

—article by Sahil Arora — VP, Business Head, Payment Products, Paisabazaar.com