Here's how to use your credit card effectively

Credit cards that tell you 'buy now, pay later' are a great convenience when your cash is stretched for purchases. However, wise use of credit cards is very important for your financial health.

A typical free credit period in India is 45-51 days. If you pay off the dues within this period, the interest is saved.

If in case you are unable to pay off the entire amount within the due date, a common practice is rolling over the dues after paying the minimum amount.

This could be expensive as you would have to pay an interest of about 3 per cent per month and the new purchases made will not get any interest-free period until the dues are completely settled.

So, here's a quick look over the other schemes offered by card companies to clear off credit card bills.

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Balance Transfer

If you opt for balance transfer, you can transfer the outstanding balance from one card to another, and thereby extend the repayment period.

Process

Balance transfer can take place between any two banks. The process takes 7-10 working days and a processing fee, a maximum of 2 per cent, will be levied.

Low interest rates or sometimes zero interest rates are available for balance transfers.

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Points to be taken care

Check for hidden charges or if the bank charges a transfer fee in additional to the processing fee.

The low interest rates the banks offer on balance transfers may be for an introductory period (say 3-6 months) and once this period is over, it may return to the normal rates.

It is important to note that the credit limit of the card, on which your new due is, will be reduced proportionately.

Also remember that the balance transfer amount will be limited to a maximum 80 per cent of your credit limit.

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EMIs on Credit Cards

If you are having a problem in paying the entire credit card bill at one go, another option is to convert it into EMIs. This facility is similar to a personal loan.

But here, unlike personal loans there is no paper work and no waiting for approvals either.

Another advantage here is that you need to pay a lower interest rate of about 1.5 to 2 per cent (each month) whereas the normal credit card rollover interest rate is higher than 3 per cent.

Also, while this scheme is running, one still gets the interest-free period on new purchases.

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Process

Banks normally have tie-ups with selected merchant establishments for EMI conversions of purchases.

In most cases, you have to pay a one-time processing fee. Some banks offer interest-free EMI schemes by asking only processing fees, while some levy both. Even the latter is still cheaper than the rollover facility of cards.

The pay-back tenure varies across banks and types of cards and so is the minimum transaction amount that can be converted. For many banks, a customer at a time can convert only a maximum of three large ticket transactions.

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Points to be taken care

It is very important to understand what you are paying and how it works to make sure that you don't end up paying too much.

For example, you purchase for Rs.1000/- and opt for a 12 month repayment. The EMI at a monthly reducing balance of 1.5 per cent is Rs.91.68/-.

It means a yearly 18 per cent interest on reducing balance or a flat interest rate of 10 per cent (1.5 per cent x 12 months).

At the end of 12 months, you have paid 10 per cent more than the product's actual price. And, not to forget the additional processing fees that may be levied.

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Banks are quick to call you and offer to convert a purchase into EMIs. Before you agree, ask about the processing fees, interest rate, prepayment charge and flexibility in time periods.

Also note than if you miss a payment, the rate will jump to the regular.

Banks run zero per cent interest programmes for EMI conversions at merchant establishments to lure customers.

They are a great relief to those customers who struggle to pay off the entire amount due at one go. But here also, a processing fee is charged from customers.

The credit card market is highly competitive, so always try to find the card that can benefit you the most.