The Hidden Costs of Credit Cards: What You Need To Know Before Swiping?

When utilised properly, borrowing may be a very useful tool, but it's essential to fully comprehend the costs associated with any financial instrument. Although short-term loans, credit cards, and personal loans provide easy access to money, it's important to be aware of their hidden fees. If balances aren't paid off each month, credit cards can have high interest rates, but short-term and personal loans can also have penalties and charges that mount up over time. Short-term loans and credit cards provide immediate financial relief, but it's crucial to account for hidden charges like late fees, international transaction fees, and overlimit fees. Although credit cards are convenient, they can rapidly accrue hidden fees. If balances aren't paid in full, interest rates can be substantial, especially on delinquent amounts, which can result in expensive debt. Monthly statements may include annual fees, expenses related to overseas transactions, and fees for balance transfers.

Key Hidden Credit Card Charges

Here are three hidden costs of credit cards in India that many users are not aware of according to Mr. Rahul Banerjee, Managing Director of PGP Academy.

1. Cash Advance Charges: While most individuals are aware that withdrawing cash with a credit card incurs a fee, many are unaware of how expensive it is. Apart from the cash advance charge (usually 2.5% to 3.5% of the amount), interest begins to accrue immediately on the day of withdrawal, with no grace period. Furthermore, the interest rates for cash advances are typically greater than for regular purchases, making it one of the most expensive credit card transactions.

2. GST on Fees and Interest: Every time you're charged a fee or interest on your credit card, Goods and Services Tax (GST) is levied on top of it (currently at 18%). This applies not just to late fees or interest but also to service charges like cash advances, over-limit fees, and foreign exchange transactions. This tax often increases the effective cost without users realizing it.

3. Interest on Interest (Compounding): If you carry forward an unpaid balance, the interest is charged on your outstanding balance. What's often overlooked is that if the interest is not paid off in the next billing cycle, interest is again charged on that unpaid interest (compounding effect). This significantly increases the overall debt for users who only make minimum payments, making it hard to reduce the balance.

Importance To Know About Credit Card Hidden Charges

Credit cards and short-term loans offer quick financial relief, but it's important to factor in hidden costs like overlimit fees, foreign transaction fees and late fees. Responsible borrowers look beyond convenience and examine the total cost of borrowing, ensuring they choose an option that doesn't strain their finances. Understanding each product's terms can help you manage debt effectively and make smarter financial decisions, as per Amit Bansal, Founder, BharatLoan.

Borrowing can be a powerful tool when used wisely, but it's essential to fully understand the costs associated with each lending product. Credit cards, personal loans, and short-term loans offer financial convenience and quick access to funds, but it's essential to understand their hidden costs. While credit cards can come with high interest rates if balances aren't paid off each month, personal and short-term loans may also involve fees and charges that add up over time.

When considering any lending product, it's wise to check for additional fees like prepayments or foreclosure and understand repayment terms to avoid unexpected financial strain. Responsible borrowing means opting for financial products that align with your repayment capability and financial needs, as per Vikkas Goyal, Founder Rupee112.

How To Make The Most of Credit Card Charges?

As per Mr. Animesh Hardia, SVP, Quantitative Research - 1 Finance, as the festive season nears, we look forward to gift shopping and great deals. However, before using your credit card, be aware of hidden costs that can quickly add up. These extra expenses can turn a joyful shopping experience into an unexpected bill.

Most importantly credit card is a double-edged sword, it is designed to make the most out of your bad financial behaviour. Hence in order to assess the ideal behaviour we have made a patent pending financial behaviours score calculator for 1 finance customer.

If you fail to make your credit card payment by the due date, a late payment fee will be charged based on your outstanding balance. To avoid this, you must pay at least the minimum amount by the due date. However, unpaid balances attract finance charges of up to 42% annually, adding significant costs until the full amount is cleared and affecting your credit score.

If you earn Reward Points, be aware of Redemption Fees when redeeming them for gift cards or vouchers. Also, when shopping internationally or online from foreign retailers, be aware of foreign exchange markup fees, which can add 1-3% to your total purchase.

Take note, smart shoppers: Always read your card's schedule of charges, understand the billing cycle, and plan purchases accordingly. Your credit card can be a powerful financial tool, but different credit cards have different use cases some are best for shopping for electronics while some are for jewellery, we have rated the best credit cards on 1 finance website to help you with this. This festive season has a safe & financially prudent Diwali, said Mr. Animesh Hardia.

How To Make Spending Decisions With Credit Card Hidden Charges?

As per S Ravi, Founder , Ravi Rajan & Co, credit cards offer convenience, but hidden costs can add up quickly. Interest rates, especially on unpaid balances, can be high, leading to costly debt if balances aren't paid in full. Annual fees, foreign transaction fees, and balance transfer fees can sneak into monthly statements.

Many cards also come with late payment fees, which can trigger higher penalty APRs, making borrowing more expensive. Moreover, cash advances are often subject to immediate interest and additional fees. Understanding these potential expenses can help cardholders avoid surprises, maintain financial health, and make better-informed spending decisions with their credit cards. Monitoring credit card statements is essential and comparing credit offerings is important, said S Ravi.

How To Unlock The Benefits of Credit Card Hidden Fees?

As per Prashant Kumar, Founder and CEO, Kredit.Pe, credit cards have long been a powerful tool for managing personal finances, providing benefits like convenience, rewards, and even access to short-term credit. While "hidden costs" might sound intimidating, users should look at the detailed features and terms of their cards to unlock their true potential. One of the key beliefs for us at Kredit.Pe is to empower our users with transparent information on our platform to ensure informed usage.

There are broadly four areas that users should look out for. The first two include interest payments on any unpaid balance and the associated penalty, which can quickly add up if bills are not paid on time. Third, users should check if there are any charges on overseas payments. Lastly, annual fees are usually offset by the rewards and perks that come with the card in the first year, but become effective during renewal of the card, Prashant Kumar further commented.